Taiwan's reclusive policy banks break new ground

Policy banks are strange breeds. 

Little known and rarely mentioned, they tend to edge into the public consciousness only when something, somewhere, has gone awry. Then they step in, guaranteeing projects or rolling over loans to systemically important but struggling corporates. 

No two policy banks are the same. They differ according to the prevailing needs of the sovereign that formed and owns them, often adapting to suit the local financial climate.

KfW, founded in 1948 to help rebuild war-torn West Germany and now a diversified institution, engages in everything from development aid to microfinance. China Development Bank, one of Beijing’s three big policy lenders, has shifted gears at least three times. It started life underwriting construction projects at home (airports, highways, dams), and later financed commodities-related projects in the developing world. Now it is focused on the Belt and Road Initiative, president Xi Jinping’s plan to redraw the trade map in China’s image.

Then there’s Taiwan, where the policy banks are unlike any of their international peers, a result of the unique nature and state of the economy.

Take Taiwan Business Bank (TBB), with its stated aim of supporting the capital needs of local small and medium-sized enterprises. Its glass-and-steel headquarters on Ta Cheng Street to the east of the Tamsui River in Taipei are utterly nondescript, the clothing of a lender that is keen to go unseen. When Asiamoney visits on a muggy afternoon, the building is doubly invisible, clad in a shroud of scaffolding that prevents anyone from seeing in or out.

Inside, everything is quiet and calm; the silence on the executive floor, where the bank’s chairman, Bor-Yi Huang, is waiting in a natty dark suit with a bright yellow tie and slip-on shoes adorned by shiny gold buckles is, if anything, even more intense. But the welcome is generous, particularly given how rarely Huang speaks to the local media, let alone a foreign journalist. 

In keeping with its architectural façade, TBB is all but unknown to the island’s 23.4 million people; a vox pop conducted afterwards on the streets of Taipei about the bank’s identity and objectives elicits shrugs and raised eyebrows.

Perhaps that explains the chairman’s determination to start the conversation by dispelling a few of the myths that have grown up around the lender.

“A lot of policy banks might be seen as old-fashioned and plodding and staid, but we are the opposite – nimble, creative, innovative and forward-looking,” he says in a gentle voice. “We are constantly evolving, investing in our digital services and in new IT systems. We might be called a policy bank, and we are proud of the designation, but we have learned from the best private-sector banks, and we know how to reach and service our customers.”

Fortunately for TBB, tracking down buzzing young Taiwanese enterprises with an eye on the export market is never going to be hard. The island is chock-full of multinationals widely viewed as global leaders in their field, from cycle manufacturer Giant to chip-maker Taiwan Semiconductor and electronics firm Foxconn.

But it is also crammed with SMEs. 

Despite being Asia’s sixth-largest economy, Taiwan boasts 1.28 million of them, according to the SME Finance Forum, an industry platform overseen by the IFC. That’s more than Japan, with 1.12 million at the end of 2016, and indeed everywhere else in Asia, with the exception of China. An estimated 86% of Taiwan’s adults work for smaller enterprises, more than any large economy in Asia, Europe or the Americas.

This army of bite-sized firms – some on the way up, others content to peak long before reaching global status – need financial help, and they often find it on Ta Cheng Street, or in one of the bank’s 125 domestic branches. TBB’s foreign network includes full bank branches in Tokyo, Sydney and Hong Kong, a representative office in Myanmar, and two microfinance divisions in Cambodia.

Huang is keen to underline the fact his employer has an unusually narrow aim in life.

“Our primary objective is to support government SME policy and to assist our customers when they expand into international markets,” he says. “We aren’t just a medium-sized commercial bank. At our heart, we are an SME-focused bank with a special mission. We’ve been helping Taiwan’s best and super-competitive firms take on the world for more than 100 years, and we aren’t going to change.”

That doesn’t mean it’s a one-trick pony unable or unwilling to provide capital to individuals in search of a loan and a simple bank account. At the end of March, the bank says its 29,566 SME customers accounted for 45% of TBB’s entire loan book, followed by consumers (24% of its loan book), state-linked firms and agencies (17%) and large corporates (10%). 

Total outstanding lending to SMEs rose 11.5% in 2017, to $15.7 billion.

Nor is it a bare-bones institution that simply lends to smaller firms and waits for the profits to stack up. Huang says the bank supports SMEs “any way it can”, providing mezzanine finance, backing venture-capital firms, and providing everything from letters of credit and project finance to M&A advice.

He points to the specific needs of firms involved in the export of frozen meat, a fast-growing export sector: “We have big food producers, but they cannot enter markets in southeast or south Asia without the right halal certificates. We can help them there, and with outsourcing finance. We have strategic partners across the region that help our customers break into new markets. With our help, our Taiwan clients can thrive.”

TBB is unusual in other ways, from its ownership structure to its adherence to the profit motive. Unlike many policy lenders, it is publicly traded, having been privatized and listed on the Taiwan Stock Exchange (TSE) in 1998. Its stock, as reliably unexciting as they come, has spent the last decade very slowly inching higher.

But its shares have enjoyed, by their standards, a stellar year, rising 15% over the 12 months to late May. That puts it ahead of another policy bank, First Financial Holding (controller of First Commercial Bank), up 9.75%, as well as commercial lender Fubon Financial Holding (controller of Taipei Fubon Bank), up 12.56%, but behind E.Sun Financial Holding (controller of E.Sun Commercial Bank), up 21.5%, and Taishin Financial Holding (controller of Taishin International Bank), which is up 18.3%. 

TBB shares performed well in part thanks to the bank’s more cash-heavy dividend policy. It paid a dividend of NT$0.69 (2.3 US cents) a share in the full year 2017, 40% of which was paid out in cash, an all-time high; based on the share price in late May, that means a dividend yield of 7.4%.

A diverse range of institutions own shares in TBB, including the Bank of Taiwan (17.2% of the issued equity), the ministry of finance (2.21%) and Citi’s Taiwan office (just under 1%). In all, foreign institutional investors own just over 21% of a lender viewed by Taipei as essential to the stability of one of the region’s richest economies. 

Even by the standards of the past decade, this is an institution that faces a gamut of challenges, any of which might dispirit a lesser lender. Like all banks here, it is all but shut out of the enormous market across the Taiwan Strait. TBB has two fully operational bank branches in China – one in Shanghai (where it also part-owns a leasing company), and another a few hundred miles up the Yangtze River in Wuhan, and can provide renminbi services to its customers on the mainland.

But with decades-old divisions between Beijing and Taipei showing no signs of being resolved, TBB is prevented from expanding its remit in a market awash with many of Taiwan’s best and most globally minded corporates.

“This is the main challenge to our ability to be bigger and more competitive,” says Huang. “The Chinese government restricts our overseas activities and affairs, so we must try our best to help promote our customers in other [overseas] markets.”

That’s an interesting statement in itself. His meaning is slightly lost in translation: Beijing cannot after all exert total control over Taiwan’s lenders. But there is an element of truth at work here. China’s re-emergence as a global power has come at Taiwan’s expense, including at the financial level. Compare TBB’s two mainland branches, with Citi’s 42, or Hong Kong-based Bank of East Asia’s 89. HSBC has full-service branches in 33 mainland cities.

Taipei’s inability to break bread with China does not hurt its global corporates, whose capital and knowhow Beijing is still happy to accommodate. But the island’s lenders suffer. They have minimal presence in the market, and thus little or no contact with corporates working there, whatever their nationality.

“Even if a Taiwan bank opens a branch in a second- or third-tier Chinese city, I’d question their ability to make the most of the opportunity,” says a foreign banker based in Taipei. “Who are they going to hire? What resources can they bring to the table? What know how would they lean on?”

And the impasse adds to a growing sense of isolation. Every year, the island’s drifts a little further from global affairs. Taipei’s reaction has been a mix of patient rationalism and sudden rushes of blood, interspersed with long, frozen periods of inactivity.

When Taiwan was supplanted at the United Nations by mainland China in 1971, it reacted by transforming the nature and focus of several of its medium-sized commercial lenders. 

First Commercial Bank was converted into a policy lender with a remit to serve the island’s larger corporates. Also listed on the TSE, it had 208 branches at the end of 2017, including 19 in Asia, Europe and North America.

In 1976, TBB underwent its own seismic shift. That year, it was converted from a normal medium-sized commercial lender into an institution whose stated aim was, the bank says, to provide specialist financial assistance and guidance to “millions of SMEs”. 

Export-Import Bank, set up in 1979, is mandated to provide export finance and insurance to local exporters.

But for too long, the government’s reaction to China’s grindingly effective isolation strategy has been to bury its head in the sand and assume that a solution would present itself. That changed in 2016 with the election of a new president, Tsai Ing-wen, whose New Southbound Policy was designed to boost the island’s connections with nations in south and southeast Asia, while transforming the banking sector’s regional prospects.

Commercial banks such as Taishin Financial Holding and CTBC Financial Holding reacted with vigour, opening offices from India to Singapore and Australia, while TBB actively eyed new opportunities in south and southeast Asia. 

“We want to put our resources to work where our customers are, in fast-growing markets with good demographic dividends, rising incomes and a growing middle class,” Huang says. “That could mean buying opportunities, opening local branches, setting up joint ventures, or just supporting our clients with our loan book.”

So far, that approach is working. TBB generated 25% of group-wide net income from its overseas operations in 2016; by 2017, that share had jumped to 37%. Australia, a key target market, accounted for NT$23.9 billion ($800 million) of loans disbursed by the bank in 2017, or 22% of all new lending, against NT$15.8 billion and a 16% market share the previous year.

But how much impact the likes of TBB can have in Asia in the long term remains to be seen. Their loan book is growing, but their international resources will remain limited unless they start to buy up regional banking assets – an unlikely strategy shift for a policy lender.

“They’re a worthy outfit to be sure, but they lack the knowhow and the expertise to do business outside Taiwan,” says the foreign banker. “They have a branch here and there, but really, why bother? It’s not just them. Their problem, and this applies to commercial banks too, is they don’t know how to run an international operation, let alone a global operation. Honestly, it’s over their heads.”

Harsh words indeed. To be fair, there is a growing realization at the highest levels in Taipei that none of its policy lenders are really up to the task. So decisions have been made and, unusually for an industry used to plodding along at a glacial pace, action has been taken. 

In November 2017, the ministry of finance sacked the chairmen of three leading policy lenders. In came new faces: Huang at TBB, Ray Dawn at First Commercial Bank and Lei Chung-dar at Taiwan Cooperative Bank, an institution that supports farmers, fishermen and credit unions. Given that the upper echelons of policy banks tend to be positions reserved for veteran civil servants on the brink of retirement, the choices were surprisingly suitable.

All of the new hires were economists with doctorates and years of experience in the financial and corporate sectors – a point the finance ministry was desperately keen to emphasize. 

Dawn was a former chief executive of Taiwan’s third-largest commercial lender, Mega Financial, while Lei was previously head of finance for Kaohsiung, Taiwan’s third-largest city.

Huang’s resumé, probably the most diverse and peripatetic of the trio, included stints at leading lenders E.Sun and Bank of Kaohsiung, as well as at a handful of brokerages. He was working as president of the Taiwan Academy of Banking and Finance when the knock came on the door. 

“He joined because he had no choice,” says a good friend of Huang’s. “The government called him in and told him to inject more atmosphere and soul into TBB, to transform its finances, and to strengthen the quality and international experience of its senior management.”

Analysts say the finance ministry had long been waiting for a cast-iron excuse to shake up the island’s policy banks. When the opportunity came in August 2017, it was a shock to everyone. 

Ching Fu Shipbuilding, hired to build six minesweeper ships for the ministry of defence, had, it transpired, been falsifying its progress reports for years. When it defaulted on a NT$20.5 billion syndicated loan that month, the 14 banks that underwrote the facility were censured and fined by government.

All of Taiwan’s handful of policy lenders, including TBB and First Commercial Bank, as well as Bank of Taiwan, Hua Nan Bank, Land Bank of Taiwan and Chang Hwa Bank, had participated in the facility; all took a financial hit. FCB, which led the syndication, took a NT$4.8 billion write down in the fourth quarter, attributing a 10.7% fall in net income in 2017 to the default. TBB reported an 8.5% fall in net income.

When the topic is raised in TBB’s boardroom, Huang shifts in his seat and sighs. That the default happened on someone else’s watch, and led to his appointment, is clearly cold comfort.

“With Ching Fu, this kind of loan is a policy loan, and we have already changed our loan policy,” he says, looking deeply uncomfortable. “We are improving our KYC [know your customer] systems, reinforcing our risk-management systems. We had a very stable and loyal relationship with this customer.”

That’s not all. 

“To prevent another Ching Fu case from happening, we have informed all of our local and foreign branches to exercise extra caution, to strengthen loan evaluation, and to review procedures when handling similar cases in the future,” he says.

And therein lies the quandary facing TBB and its peers. If a long-standing client comes calling in search of fresh capital, does the bank acquiesce, even if it harbours suspicions about the firm’s financial stability? What happens if the same government that penalised half the banking sector, and which ultimately controls all of the island’s policy lenders, comes calling a few months from now, urging them to prop up an important corporate, or to channel capital to a key project? It’s not impossible to envisage. 

A parliamentary investigation is under way in Taipei to determine whether or not the former president, Ma Ying-jeou, personally interfered to convince lenders to raise capital for Ching Fu. In the wake of the scandal, the government introduced an additional safety measure: thoroughly vetting any project loan, policy loan or syndicated loan of more than NT$2 billion.

Huang tilts his head and thinks. 

“We can say no to the government and to clients,” he says finally. But the Ching Fu debacle clearly still grates. 

“We had to write off the entire bad debt,” he adds. “It was supposed to be a good deal, as they had a strong trading record and a good relationship with the department of defence. But these things happen, and in the future, even with instructions from government, we will be more careful before going ahead with any kind of loan.”

There’s another factor to consider. TBB, ranked the country’s 15th largest lender by assets, according to data from the Bank for International Settlements, has a decent financial record. It reported net income before tax of NT$5.8 billion in 2017, on revenues of NT$20.4 billion. Its return on equity and assets could be better, coming in lower-than-expected at 7.9% and 0.38% respectively in 2017 – more collateral fallout from Ching Fu. But it is financially sound, with a capital ratio of 12.3% at the end of last year, and a bad-loan ratio of 0.3%, according to BIS.

But this also belies the bank’s biggest systemic weakness, one shared by all policy lenders. It may be superficially beholden to the profit motive, but its big decisions – notably who it lends to and who it does not – can reverberate for years to come. “We emphasize long-term relationships that run and run, lasting 20 years, 30 years, even longer,” says Huang, meaning that TBB might sign off on a loan today that is still being extended and rolled over and repaid in the 2040s.

“If the economy suffers from a downturn, and our clients get into trouble, we help enterprises get through difficulties, while ordinary commercial banks tend to withdraw funds quickly,” he adds. 

Huang points to the bank’s SME Disaster Recovery Project, launched in 2006, which financially supports SMEs whose operations were dented or destroyed as a result of earthquakes, fires, floods and typhoons (all are a dispiritingly regular occurrence here). 

“We provided strong support to SME customers through the 2016 Tainan and 2018 Hualien earthquakes,” he notes.

So as patient and courteous as he is, there is clearly immense pressure on Huang and his employer to make good lending decisions that last the test of time. That sensitivity emerges when he compares the island’s surfeit of commercial lenders (38) unfavourably with its cluster of policy banks.

“Taiwan is overbanked,” he says. It’s a view shared by most people here, but he builds up a head of steam. “The commercial banking system is too crowded, too competitive.”

But when it comes to policy banks, he says, there “aren’t enough to support government policies or the needs of every corporation. To strengthen our position as a specialized SME bank, we need greater financial support from the government, to differentiate us from ordinary commercial banks.”

Many would disagree: to have several policy lenders in one wealthy, developed, medium-sized Asian economy sure seems a lot. But it underlines the burden the chairman feels to fund as many of Taiwan’s better SMEs as possible. He would, one feels, like just a little more help.