Taiwan banking: Despite global woes, CTBC stays international
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Northeast Asia

Taiwan banking: Despite global woes, CTBC stays international

The bank has put international expansion at the centre of its strategy, and will not be deterred, despite a worsening trade war and the spread of the coronavirus.

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CTBC Bank is the most international of Taiwan’s banks. The privately owned bank draws its overseas income from a branch network that spans 14 markets, including subsidiaries in the United States, Canada, Indonesia, Japan and the Philippines, and which it has been growing in earnest for the last two decades.

It also plans to expand its presence in China, where it already owns a leasing company.

Such international vision is a smart move for a bank that is too big to grow much more in its home market. But this year, that offshore exposure has brought additional risks.

Although the Taiwanese government was able to contain the coronavirus before it spread, CTBC’s large overseas network means it is more exposed than most of its domestic peers.

Daniel Wu_ctbc_160x186
Daniel Wu,

Taiwan has been relatively unaffected by the coronavirus, at least compared with its Asian neighbours and many countries around the world, with only seven deaths from Covid-19 as of May 27.

But its export-oriented economy will feel the pain of disruptions to global supply chains and shrinking demand for its primary export industries of technology and machinery.

The central bank cut its full-year economic growth outlook for 2020 to 1.92% in March, from a forecast of 2.57% in December. Some economists think it is still being optimistic.

Taiwan’s central bank has cut the benchmark interest rate by 25 basis points to 1.125%, while the government has rolled out a debt relief programme for small and medium-sized enterprises and individuals suffering the impact of the coronavirus.

Taiwan’s government was already encouraging firms to turn their focus back to the domestic economy in response to the trade war between the US and China before the onset of the pandemic.

That trade war undermines one of the obvious stepping stones for Taiwanese banks moving overseas: serving their local customers in foreign markets. Now, the relocation of factories from China to Taiwan is speeding up, in large part thanks to the coronavirus, says an equity analyst who covers Taiwan for a US firm.

The move is good news for many Taiwanese banks, according to this analyst. But it raises questions about CTBC’s long-standing strategy. As the trade war increases protectionism and the coronavirus closes borders, business may become more local. Should CTBC follow suit?


CTBC has been stung in several of its international ventures this year, and not only because of the coronavirus. The firm’s Japanese subsidiary has been hurt by the delay of the Tokyo Olympics. Its US arm’s exposure to the mortgage market is also a big worry as the coronavirus spreads. And its Singapore operation is caught up in the meltdown of oil trader Hin Leong Trading.

But CTBC is undeterred, determined to continue its drive into foreign markets. The bank reported NT$103.7 billion ($3.5 billion) in revenue last year and total assets of NT$4.23 trillion.

Top-tier firms Mega International Commercial Bank and Cathay United Bank last year had total assets of NT$3.33 trillion and NT$2.97 trillion, respectively.


Andy Chang,
Taiwan Ratings

Some analysts think CTBC has no choice but to continue its overseas expansion.

“CTBC is too large in Taiwan, they need to grow outside of Taiwan,” says the equity analyst at a US firm. “They have been the most aggressive in expanding overseas.”

That is not easy. Competition is fierce among Taiwanese banks for business from the islands’ world-renowned corporations, including a swathe of companies in the technology supply chain.

Lenders cannot continue to rely on business from the offshore operations of Taiwanese companies to fuel their own international expansion, says Andy Chang, senior director, financial services ratings at S&P Global’s subsidiary Taiwan Ratings.

“Taiwanese corporates are a starting point in foreign countries, but as banks grow their lending base, they need to migrate to local corporates,” says Chang.

That cuts to the heart of CTBC’s offshore strategy, according to Daniel Wu, CTBC Financial Holding’s president. The bank is trying to become a truly international player by putting local relationships at the core of its offshore business.

To have a successful international business you have to be localized, you have to be able to analyze local credit and to be able to serve local customers - Daniel Wu, CTBC

“A lot of Taiwanese banks set up a branch overseas and then only serve Taiwanese customers; we don’t call that international business,” says Wu. “To have a successful international business you have to be localized, you have to be able to analyze local credit and to be able to serve local customers.”

CTBC’s overseas operations, which span Asia Pacific and include a local bank in the US, contributed about NT$13.6 billion, or 35.4%, of its profits in 2019.

The firm’s overseas returns, which it plans to increase to more than half its total income within three to five years, make it an outlier among its domestic peers.

“Compared to Hong Kong and Singapore, Taiwan’s banks are very far behind when it comes to international expansion,” says Yafei Tian, an analyst at Citi. “Most Taiwanese banks generate under 20% of their bottom line overseas.”


Yafei Tian,

CTBC will focus its energies this year on the biggest, and arguably most difficult, banking system it operates in: China.

“China is a natural extension because we speak the same language, we share some of the same culture,” Wu says. “We understand that market better than Europeans and Americans.”

But he wants to boost CTBC’s limited presence on the mainland faster than the pace that organic growth can deliver.

CTBC has four branches in China: one in Shanghai, one in Guangzhou, one in Xiamen and, as of this year, one in Shenzhen. It also has two sub-branches in districts of Shanghai and a representative office in Beijing.

Wu is now looking for a local acquisition, which he hopes could be available at a discount.

“Acquisitions are a big part of our plan, and now that valuations are lower – that definitely helps,” says Wu. “We will keep growing organically through Taiwanese businesses, but the problem is that we only have four branches [in China], so the size of a loan we can offer is relatively small.”


The dilemma arises with leading companies such as Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor manufacturer and a supplier to Apple and Foxconn, the multinational electronics manufacturer.

“Foxconn or TSMC, for example, they are very big companies,” says Wu. “We won’t be able to provide full services given our four branches’ funding capability. If the opportunity arises where we can acquire a city commercial bank or some other financial institution, we will definitely consider it.”

But there are risks to doing business on the mainland, warns Wu, pointing to the quality of assets as a key concern.

“There is a lot of fraud in China,” he says. “Twenty years ago, when I was in China, lots of things could be faked. But it is getting better and better because they want to be an international player, so they have to be up to international standards.”


Sonny Hsu,

Wu is on the lookout for a Chinese provincial-level city commercial bank that holds a licence to operate in a specific area of the country. But this decision is not the result of an exhaustive analysis of all the available options. CTBC has few other choices.

The only realistic acquisitions for Taiwanese banks in mainland China are those of city commercial banks, says Sonny Hsu, senior credit officer at Moody’s. National banks, whether state-owned or privately owned, are just too expensive.

“City commercial banks don’t have national networks,” says Hsu. “If Taiwanese banks acquire them, they are limited to a certain geography. Most Taiwanese banks have branch networks spread over a small number of cities and they offer services to Taiwanese corporates, which is their bread and butter. They also lend to certain large enterprises in China; they are not comfortable lending to small local clients yet.”

So far there has only been one Taiwanese acquisition of a mainland Chinese bank, when Fubon Financial bought a majority stake in First Sino Bank in January 2014. It renamed the firm Fubon Bank (China).

Most Taiwanese banks have branch networks spread over a small number of cities and they offer services to Taiwanese corporates. They also lend to certain large enterprises in China; they are not comfortable lending to small local clients yet - Sonny Hsu, Moody’s

PBut First Sino was a joint venture between investors from Taiwan, Hong Kong and mainland China, which made Fubon more comfortable with the acquisition, adds Hsu. A joint venture is an option for CTBC, although the bank would insist on getting management rights.

If China is the main plank of CTBC’s international ambitions in the coming years, the bank must also keep a close eye on the assets it already has in Japan, southeast Asia and the United States, especially since its capital costs are rising.


CTBC’s cost of capital has risen after it was named one of five domestic systemically important banks (D-Sibs) by Taiwan’s financial regulator last year. The too-big-to-fail label requires the bank to boost its capital buffers by four percentage points within four years.

“Being a D-Sib makes capital very expensive, so we are trying to improve our capital efficiency,” says Wu.

That has inspired some creativity at CTBC. The bank has set the ball rolling on a plan to digitalize parts of its expansive overseas network.

“Thanks to new technology and all these fintech players in Asia, we are starting to think about changing our traditional banking model for some of our overseas presence,” says Wu.

“For example, we are looking for partners to collaborate on fintech so we can change our Indonesian and Philippine models.

“We believe fintech is going to be a major player in those markets because Indonesia and the Philippines are so spread out.”

Being a D-Sib makes capital very expensive, so we are trying to improve our capital efficiency - Daniel Wu, CTBC

The increasing cost of capital could also impact Wu’s acquisition plans, particularly if a second wave of Covid-19 was to further undermine the global economy.

“If there is a second wave and our loan book and profitability are hurt further, then of course we will pause any M&A,” he says. “We want to make sure we can survive this year with a decent performance, so we wouldn’t spend capital under those conditions.”

Taiwanese financial institutions also face the unfortunate issue of usually having to pay for acquisitions in cash. Foreign banks don’t want to do share swaps with them, says Hsu at Moody’s.

Taiwanese banks consistently trade at low price-to-book ratios. As of June 10, the average price-to-book ratio for banks in Taiwan was 0.98.

CTBC has a higher ratio of 1.23, but it aspires to be like global banks such as HSBC, which had a ratio of 4.3.

Taiwanese banks’ shares rarely move much compared with global financial institutions. That means their shares offer little upside to those considering selling assets to Taiwanese lenders, making it harder for them to replace cash with shares for acquisitions.

CTBC’s most eye-catching bank acquisition so far was that of Tokyo Star in 2014, a deal that reportedly cost just over $500 million.

The purchase was a surprising but celebrated move, becoming the first full takeover of a Japanese bank by a foreign institution.



Tokyo Star, previously owned by US private equity firm Lone Star, gave CTBC an entry into a market where few Taiwanese banks operate. But this year it also exposed its Taiwanese parent to the sting of the coronavirus.

Tokyo Star was swept up with the fervour of the 2020 Olympics and lent money to hotel developers in the city. When the games were delayed, so too were loan payments.

“In response to the 2020 Tokyo Olympics a lot of new hotels were built,” says Wu.

“Due to the pandemic and the postponement, we have seen weakness in the assets in the hotel industry held by Tokyo Star.

“Normally, in the banking business, the issues we are most concerned with are bad loans or fraud,” Wu says. “But event-driven issues are different: we really did not expect a pandemic,” he adds.

“For Tokyo Star to be lending more to the hotel business because of the Olympics was very normal because if there was no pandemic the hotels would definitely have been full, and the owners would have had no problem paying back the loans.”

CTBC was also caught off guard in Singapore in April when Hin Leong Trading, one of the world’s leading private oil traders, filed for bankruptcy protection, following a public scandal that revealed years of losses hidden by the company.

Out of the billions of dollars owed to numerous lenders, CTBC is on the hook for $90 million. The bank is negotiating with Hin Leong to try to minimize its losses.

Wu is also nervous about CTBC’s US subsidiary, which has considerable exposure to the country’s retail and commercial property market. But the bank’s primary locations are in steady areas of California, with some branches on the east coast of the country.

While CTBC Bank USA was in good shape as of May, surging unemployment in the US and potential mortgage defaults have been unsettling for CTBC’s management in Taiwan.

Overall, CTBC faces tough questions as it continues to expand overseas.

Coronavirus, the trade war and the rise of populism seem to be making the world more local at a time when CTBC wants to be more global.

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