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4.1 Overview of Banking Industry in Taiwan
In the initial stage of economic development, Taiwan government adopted financial stabilization measures and establishment of new banks was restricted, during this period most banks were owned by the state. But in 1980s liberalization and privatization of financial institutions were urged to and satisfy the need of Taiwan economic growth, as a result in 1991 Ministry of Finance (MOF) began to approve set-up of new banks and at that time there were 51 domestic banks (Shen, 2010).
According to the statistics of MOF in 2000, there were too many banks and the average scale of Taiwan banks was obviously too small; therefore, in 2001 the government implemented 〈Taiwan Financial Holding Act〉; inter-bank merger was encouraged to enlarge the scale of banks and raise overall competition and management efficiency of Taiwan banking industry. Currently there are 15 Taiwan banks as subsidiaries of financial holding companies.
Table 4-1 shows that as of the end of 2009 there are 37 domestic banks with 3,279 branches, 32 local branches of foreign banks, and other kinds of financial institutions include credit cooperatives, credit departments of farmer’s and fishermen’s associations, bills finance companies, and the postal savings system coexist in Taiwan’s banking system.
According to the analysis result from Financial Supervisory Commission of Taiwan, most domestic banks tend to expand by opening more branch offices rather than by establishing subsidiaries or joint ventures, hence on the average only one domestic bank owns almost 90 branches.
As to quantity of financial employees, in 2009 there were 156,312 employees in Taiwan banking institutions, more than 82% were hired by domestic banks, and each domestic bank has average number of 3,469 workers.
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Table 4-1: Banking Institutions in Taiwan—2009
Type
Note: Number of Branches of ‘‘Local branches of foreign banks’’ includes “Head office”.
Source: Central Bank of the Republic of China (2009), Financial Statistics Monthly, Taiwan District, R.O.C.;
Financial Supervisory Commission, Executive Yuan, R.O.C., http://www.fsc.gov.tw/Layout/main_ch/BS _BSList.aspx?path=2566& Language=1&Page=2.
In China the average number of employees of each SOCB is close to 300 thousand, merely employees of single SOCB exceed the total financial employees in Taiwan, as for JSCBs and city commercial banks the average employees of them are 13,985 and 1,109, respectively. From this aspect the scale of Taiwan domestic banks is between JSCBs and city commercial banks.
Table 4-2 shows that both in assets and in equities domestic banks accounted for major market share in Taiwan, that were 75.23% and 83.19%, respectively. In terms of assets, the postal savings system ranked the second accounted for 11.66% market share by NTD 4,762 billion, and local branches of foreign bank ranked the third accounted for 5.78% market share by NTD 2,362 billion of total assets.
With regard to equities, bills finance companies ranked the second accounted for 5% market share by NTD 116 billion of equities, and the second was credit departments of farmer’s associations accounted for 3.89% market share by NTD 91 billion of equities.
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Table 4-2: Assets and Equities of Banking Institutions in Taiwan—2009
Type
In 2009 domestic banks also accounted for major market share in terms of loans and deposits, over 90% of loans in Taiwan were credited by domestic banks, and 75.7
% of total deposits were also taken by them. Although The Postal Savings System offers only remittance and deposit services, with widespread network of more than 1,300 post offices national wide, which accounted for 15.38 % market share of outstanding deposits (Table 4-3).
Table 4-3: Loans and Deposits of Banking Institutions in Taiwan—2009
Type
Note: Loans include short-term, medium and long-term loans, overdrafts, and discounts.
Source: Financial Supervisory Commission, Executive Yuan, R.O.C., http://www.banking.gov.tw/Layout/main _en/ArtHtml_Show.aspx?ID=55d2e230-28b5-4640-a970-bacd81f2823f&path=2923.
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Table 4-4 lists top ten largest banks in Taiwan in terms of assets, all of them are domestic banks, except for Bank of Taiwan (BOT) and Land Bank of Taiwan (LBOT) are 100% state-owned, the rest eight banks have already been privatized, their shares owned by the government are less than 50%, and seven of these top ten banks are subsidiaries of financial holding companies.
If we classify these ten banks according to specialization, only Taiwan Cooperative Bank (TCB) and LBOT are classified as specialty banks, both of them have particular missions given by the government. Under the charter of TCB, one of its functions is to provide finances for cooperative enterprises, the farming and fishery industries, and LBOT is a real-estate specialty bank one of its functions is to conduct special loans pursuant to government policies to enhance national economic development, in addition to afore-mentioned special missions, TCB and LBOT also provide services of commercial banks.
According to article 10 of Taiwan’s 〈Regulations Governing Approvals of Banks to Engage in Financial Activities between the Taiwan Area and the Mainland Area〉, one of the requirements to set up representative office in China is that prior to submitting an application assets and net worth in the fiscal year of the Taiwan bank must ranked among the top ten domestic banks, up to February of 2010, except for Taipei Fubon Commercial Bank other nine Taiwan banks already have representative offices in China.
In 2009 Domestic Banks were possessed of 75.23% total assets in Taiwan banking system, but merely the sum of assets of top five domestic banks accounted for nearly 41% of market share, and also accounted for 36.14% of total banking equities.29
29 According to statistics of Central Bank of the Republic of China, as of the end of 2009 total assets and equities of
Top five domestic banks are BOT, TCB, Mega International Commercial Bank
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(MEGA), LBOT, and First Commercial Bank (FCB), they are now or once belonged to state-owned banks. Additionally, except TCB and LBOT, other three top five banks, BOT, MEGA and FCB belong to financial holding companies.
Table 4-4: Top Ten Largest Banks in Taiwan
Item
Note: 1. According to Bankscope work rank is based on each bank’s total assets of last available fiscal year.
2. World ranking is updated as of July 12, 2010.
3. If more than 50% of shares are held by the government then the bank is categorized as a state-owned bank.
4. Y indicates yes; N indicates no.
Source: Bankscope, http://bankscope.bvdep.com/ip; Official website of each banks; Financial Supervisory Co mmission, Executive Yuan, R.O.C., http://www.banking.gov.tw/Layout/main_ch/FscSearch_BankMain.
aspx?path=1614&Type=1.
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Table 4-5 summarizes amount of total assets, equities, loans, deposits, number of branches and employees of top five Taiwan bank in 2009. As the largest commercial bank in Taiwan, BOT also had the highest amount of total assets, equities, Loans and deposits.
If we sort top five Taiwan banks in terms of equities, MEGA defeated TCB and ranked the second by NTD 156 billion of equities; in terms of loans, LBOT defeated MEGA and ranked the third by NTD 1,576 billion of loans, as to deposits the ranking of these five banks were consistent with total assets. Among top five banks, TCB had 298 domestic branches and 8,980 banking employees providing the most intensive service network in Taiwan.
Table 4-5: Top Five Banks in Taiwan—2009
Note: 1. Loans include short-term funding.
2. Number of branches only includes domestic branch.
3. Number of employees of LBOT is calculated as at March of 2009.
Source: Bankscope, http://bankscope.bvdep.com/ip; LBOT, Annual Report, 2008; TCB, FCB, Annual Report, 2009.
Item
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Given top five Taiwan banks’ large scale both in assets and equities, in the study they are chosen as representative banks for Taiwan to compare with SOCBs in China regarding banking performance in different aspects.
4.2 Analysis of Profitability Performance
Figure 4-1 illustrates the composition of operating income of top five Taiwan banks in 2009, among these five banks proportion of net interest revenue of MEGA was the lowest only 58.9%, suggesting that the bank has less dependence on interest revenue as source of profit.
As for other four Taiwan representative banks, proportions of net interest revenue were between 63.30% and 74.80% while proportions of SOCBs in China were in the range of 71.10% and 81.80%, both banks in Taiwan and in China depend on granting loans to earn interest income.
Note: Each proportion of net interest revenue and other operating income just demonstrates how much share of it accounts for operating income.
Source: Bankscope, http://bankscope.bvdep.com/ip.
Figure 4-1: Composition of Operating Income of Top Five Banks in Taiwan—
2009
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From 2008 to 2009 with 211.63% growth rate of net profit, MEGA was the only bank enjoyed growing net profit among its peers, moreover, in 2009 MEGA was also the king profit maker in Taiwan banking industry, but at the same time other four Taiwan top banks all suffered backward net losses due to the global financial tsunami which occurred in the third quarter of 2008 originated from USA deteriorating overall performance of Taiwan banking industry (Table 4-6).
On the contrary, during the same period net profit of every SOCB in China maintained positive growth rate (5.71% to 29.9%), banking performance seemed not suffer much from financial and economic crises.
Table 4-6: Net Profit of Top Five Banks in Taiwan－2008~2009
Unit: NTD billion
Banks
Year
BOT TCB MEGA LBOT FCB2008 8.15 7.53 3.42 5.86 8.97
2009 8.12 6.87 10.66 5.70 2.05
Growth Rate
(%)
-0.43 -8.72 211.63 -2.70 -77.09
Source: B ankscope, http://bankscope.bvdep.com/ip.
Table 4-7 summarizes indicators regarding profitability evaluation of top five Taiwan banks; from 2007 to 2009 all of them had decreasing ROA and ROE. In 2009 ROA and ROE of BOT dropped to 0.22% and 3.5%, respectively; ROA and ROE of TCB dropped to 0.27% and 6.32%; ROA and ROE of MEGA dropped to 0.5% and 7.16%, respectively; ROA and ROE of LBOT dropped to 0.28% and 5.73%, respectively; for FCB its ROA and ROE dropped to 0.11% and 2.29%, respectively.
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Among others MEGA had the highest ratios of ROA and ROE in 2009, conversely FCB had the lowest figures of both indicators. During the same period in comparison with SOCBs of China not only ROA but also ROE of were higher than Taiwan top five banks.
As to Cost-to-Income ratio, the average ratio of Taiwan top five banks was around 52.33% from 2007 to 2009; during the same period the average ratio of SOCBs was below 40%; therefore, operating cost of Taiwan banking was higher than China banking. Besides, NIM of each Taiwan top five banks was also lower than SOCBs, showing that interest spread between loans and deposits in Taiwan banking industry was smaller than China’s.
Table 4-7: Indicators of Profitability of Top Five Banks in Taiwan—2007~2009
Unit: %
Bank BOT TCB MEGA LBOT FCB
Item Year 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009
ROA 0.38 0.24 0.22 0.41 0.31 0.27 0.75 0.17 0.5 0.34 0.31 0.28 0.75 0.52 0.11
ROE 5.09 3.45 3.50 9.73 7.19 6.32 9.28 2.33 7.16 6.53 6.18 5.73 13.6 10.01 2.29
Cost-to-Income
Ratio 56.72 58.08 58.74 57.14 57.11 60.55 39.01 51.89 39.18 52.57 52.13 55.28 42.91 45.96 57.63
Net Interest Margin 0.56 0.73 0.48 1.14 1.21 0.98 1.27 1.43 1.08 0.95 0.99 0.81 1.48 1.52 0.93
Source: Bankscope, http://bankscope.bvdep.com/ip.
In the end of year 2009, there are 406 financial institutions in Taiwan, and the number of branches has reached 5,876, on the average a branch provide services to
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3,935 Taiwan citizens, but in China one branch banking institution serves around 6,900 people, serious overbanking problem and competitive financial markets have suppressed profit margins in Taiwan banking industry.30
No wonder decreasing figures of ROA, ROE, net interest margin, and increasing cost-to-income ratio demonstrate that profitability performance of Taiwan top five banks was worse than SOCBs in China.
According to the report of credit rating agency-Fitch Ratings, comparing banking sectors of Asian countries, average ROA of China’s banking industry in 2009 was 1%, suggesting that its profitability was stronger than Taiwan (0.3%), Hong Kong (0.9%), South Korea (0.4%), Malaysia and India (0.9%), but inferior to Singapore (1.1%), Thailand (1.1%), Philippines (1.2%), Indonesia (1.9%), and Vietnam (1.2%), in this regard profitability performance of Taiwan banking industry was the worst among Asian countries (Figure 4-2).
Source: Fitch Ratings, http://www.fitchratings.com.
Figure 4-2: ROA of Asian Banking Industry—2009
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4.3 Evaluation of Assets Quality
From 2007 to 2009 only BOT had increased NPL ratio, meanwhile, the ratio of TCB decreased from 1.67% to 1.43%, for MEGA the ratio decreased from 1% to 0.95%, for LBOT the ratio decreased from 1.15% to 0.79%, as to FCB the ratio decreased from 1.5% to 1.32%. In 2009 among top five Taiwan banks, NPL ratio of LBOT was the lowest while the ratio of TCB was the highest; however, since 2007 these five Taiwan banks have maintained very low NPL ratios and some figures were even less than 1% (Table 4-8).
Table 4-8: NPL Ratio of Top Five Banks in Taiwan —2007~2009
Unit: %
Bank
Year
BOT TCB MEGA LBOT FCB2007 0.97 1.67 1.00 1.15 1.5
2008 1.06 1.52 1.16 1.00 1.45
2009 1.03 1.43 0.95 0.79 1.32
Source: Bankscope, http://bankscope.bvdep.com/ip.
During the same period NPL ratios of SOCBs in China were falling annually, in 2009 NPL ratios of SOCBs were all less than 2%; by comparison the figures were still higher than Taiwan top five banks nevertheless. As a result we can say that assets quality of Taiwan banking is better than China banking.
According to the research report of credit rating agency-Fitch Ratings, comparing banking sectors of Asian countries, the average NPL ratio of China’s banking industry in 2009 was around 1.6%, higher than Taiwan (1.3%), Hong Kong (1.4%) and South
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Korea (1.2%), but lower than other Asian countries. General speaking both banking industry in Taiwan and in China have good quality of assets (Figure 4-3).
Source: Fitch Ratings, http://www.fitchratings.com.
Figure 4-3: NPL Ratio of Asian Banking Industry—2009
Apart from NPL ratio, we should also examine coverage ratios of top five Taiwan banks to see how well they prepare for loan loss reserve to their non-performing or impaired loans. Table 4-9 summarizes coverage ratios of top five banks in Taiwan, from 2007 to 2009 only BOT had falling ratio from 71.25% to 60.82%, for TCB the ratio grew from 55.97% to 66.65%, for MEGA the ratio grew a lot from 87.1% to 126.49%, the ratio of LBOT also increased greatly from 88.18% to 145.72%, for FCB the ratio increased from 56.31% to 86.81%.
In 2007 coverage ratio of each representative Taiwan bank was smaller than 100%, which meant that at the time none of them can undertake total risk of default, in 2008 only the coverage ratio of LBOT was greater than 100 %, and in 2009 MEGA also had coverage ratio over 100 % beside LBOT.
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Table 4-9: Coverage Ratio of Top Five Banks in Taiwan—2007~2009
Unit: %
Bank
Year
BOT TCB MEGA LBOT FCB2007 71.25 55.97 87.10 88.18 56.31
2008 54.91 58.71 89.31 104.16 57.14
2009 60.82 66.65 126.49 145.72 86.81
Source: Bankscope, http://bankscope.bvdep.com/ip.
Comparing SOCBs with Taiwan top five banks, began from year 2008 coverage ratios of each SOCB already higher than 100% excluding ABC, and in 2009 the ratio of CCB even as high as 175.77%. Under strict requirements of China banking supervisory institution-CBRC, the capability of China banks to cover loan losses is getting better and better.
Despite Taiwan banks have better control over NPL problems than China banks, in the aspect of coverage ratio the ability of Taiwan banks to undertake risk of default from their customers seems poorer than China banks.
4.4 Management of Liquidity Risk
Although high saving ratio in Taiwan keeps the liquidity of financial system, global financial tsunami still brought recession and negative impact to Taiwan, hence the government made every effort to stimulate economy and fight recession.
Table 4-10 summarizes three liquidity indicators including ‘‘Net Loans/Total Assets’’, ‘‘Net Loans/ (Deposits and Short-term Funding)’’ and ‘‘Liquid Assets/
(Deposits and Short-term Funding)’’ of top five Taiwan banks from 2007 to 2009.
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Table 4-10: Indicators of Liquidity of Top Five Banks in Taiwan—2007~2009
Unit: %
Source: B ankscope, http://bankscope.bvdep.com/ip.
During 2007 to 2009 ratios of ‘‘Net Loans/Total Assets’’ of top five Taiwan banks were in the range between 50% and 76%, and figures of BOT were the lowest between 52.58% and 57.37%, while figures of LBOT were the highest between 75.02% and 75.59%, showing that around 75% of LBOT’s total assets were occupied by net loans and also reflecting the bank was less liquid comparing to peers. For last three year the average ratio of Taiwan top five banks was around 65% almost 20%
higher than the average ratio of SOCBs in China, reflecting that Taiwan banking was less liquid than China banking.
Ratios of ‘‘Net Loans/ (Deposits and Short-term Funding)’’ of Taiwan top five banks were between 60% and 84% from 2007 to 2009, and the average figure was 73.9%, meanwhile, the average figure of SOCBs was only 49.86%. In this respect, Taiwan banks were also less liquid than SOCBs.
Since 2007 ratio of ‘‘Liquid Assets/ (Deposits and Short-term Funding)’’ of BOT
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has risen steadily year after year while ratios of other Taiwan banks show only slight fluctuations, and in 2009 the ratio of BOT was almost four times higher than its peer, accordingly we could say that BOT has better capability to handle the situation of suddenly bank run. By comparison, from 2007 to 2009 the average figure was 18.94%
nearly 2% higher than the average figure of SOCBs.
After comparing afore-mentioned three liquidity indicators, both ratios of ‘‘Net Loans/Total Assets’’ and ‘‘Net Loans/ (Deposits and Short-term Funding)’’ showed that liquidity risk management of China banking industry was better and safer than Taiwan banking industry for past three years, and ratios of ‘‘Liquid Assets/ (Deposits and Short-term Funding)’’ of SOCBs evenly matched top five banks in Taiwan.
4.5 Compliance with Basel II
Since Basel I was proposed in 1988, Taiwan soon amended the Banking Act and set up the provision of minimum 8% CAR for Taiwan banks in 1989; after Basel II was promoted in 1998, Taiwan government didn’t adopt it until 2007 due to some preparation work.
On January 4, 2007 Financial Supervisory Commission issued amendments to the
〈Regulations Governing the Capital Adequacy of Banks〉 and related instructions for capital adequacy calculations; from then on Taiwan banking has officially implemented Basel II.
Table 4-11 shows CAR of Taiwan top five banks from 2007 to 2009, the figure were between 10% and 12.5%, ever since 2007 Taiwan top five banks have met the minimum requirement of 8% CAR. During the same period except ABC the figure of other SOCBs were between 11% and 14.4%, on the average the CAR of SOCBs was higher than Taiwan top five banks.
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Table 4-11: Capital Adequacy Ratio of Top Five Banks in Taiwan—2007~2009
Unit: %
Bank
Year
BOT TCB MEGA LBOT FCB2007
12.47 11.09 10.54 10.47 10.82008
11.63 10.59 11.2 10.81 10.882009
11.89 10.58 11.73 10.54 11.01Source: Bankscope, http://bankscope.bvdep.com/ip.
Table 4-12 shows Tier 1 ratio of Taiwan top five banks from 2007 to 2009, since 2007 all of them have met the minimum requirement of 4% Tier 1 ratio. From 2007 to 2009, BOT had the highest figures which were in the range of 11.35% and 12.01%, MEGA ranked the second with figures between 9.04% and 9.88%, TCB had the lowest figures which were between 6.47% and 6.74%.
During the same period the average Tier 1 ratio of top five banks in Taiwan was 8.64%, and which was a little lower than SOCBs’ 8.85% average figure; however, basically both of them have met the Basel II requirement.
Table 4-12: Tier 1 Ratio of Top Five Banks in Taiwan—2007~2009
Unit: %
Bank
Year
BOT TCB MEGA LBOT FCB2007 12.01 6.56 9.80 7.86 7.30
2008 11.35 6.47 9.04 7.52 7.10
2009 11.67 6.74 9.88 7.45 7.45
Source: Bankscope, http://bankscope.bvdep.com/ip.
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In conclusion, both average figures of CAR and Tier 1 ratio of SOCBs in China from 2007 to 2009 were higher than Taiwan top five banks and that reflects banking industry in China has better capital adequacy ability.
Above comparison results of different financial indicators and figures regarding the scale of total assets, profitability performance, assets quality, liquidity management, and capital adequacy ability of banking industry between China and Taiwan are summarized in Table 4-13.
Table 4-13: The Comparison of Banking Industry between China and Taiwan
Items Country with outperformance
Scale of Assets Profitability Performance
Quality of Assets Liquidity Management Capital Adequacy Ability
China China Taiwan
China
China
Source: Prepared by author.