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Taiwan Financial Industry- Challenges and Opportunities December 2006
Sophia Cheng >>Research AnalystMerrill Lynch (Taiwan)+886 2 2376 [email protected]
No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on pages 32. Global Securities Research & Economics Group Global Fundamental Equity Research Department>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
2Refer to important disclosures on pages 32
Taiwanese banks: low valuation in the region
Source: Merrill Lynch estimates
1. Still recovering from consumer debt problem
2. Gradual profit improvement in 2007
3. Need to find next areas of growth
• Follow your clients
• Management clients’ wealth
Dah SingBk of EAUOB SBI
NAB
DBS
CBA
Hang Seng Bk
ANZ
Chinatrust
SinoPacTaishin
Yuanta
Cathay
Fubon Kooknim
Wex bac
Woori
ESUNShinKong
CL
Bk of China
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
07E RoE (%)
07 P/B (x )How to improve?
3Refer to important disclosures on pages 32
GDP growth: Taiwan lags other emerging Asian markets
Source: Merrill Lynch estimates
2005 2006 2007F 2008F 2005 2006 2007F 2008FGlobal 4.7 5.2 4.5 4.6 3.2 3.2 3.0 3.0United States 3.2 3.2 1.7 2.5 3.4 3.2 1.5 1.8Euro Area 1.5 2.7 2.2 2.2 2.2 2.2 2.2 2.0Japan 2.7 2.9 2.6 2.0 (0.5) 0.1 0.3 0.9Taiwan 4.0 4.3 3.5 3.9 2.3 0.8 1.8 2.3Hong Kong 7.3 5.1 3.5 4.5 0.9 2.2 3.1 3.2China 10.2 10.5 9.6 9.3 1.8 1.5 2.5 2.2Philippines 5.6 5.3 5.5 5.5 6.6 6.0 5.1 5.0Thanland 4.5 4.5 4.4 5.0 4.5 4.5 2.9 2.6India 7.5 8.4 8.0 7.6 4.0 5.7 5.9 6.1
Real GDP Growth (%) CPI Inflation (%)
4Refer to important disclosures on pages 32
Credit Penetration: Total Loans as a Percentage of GDP (%)
Source: Central Bank Data, Merrill Lynch estimatesNote: Most data end-2005, some end 2004, some ML estimates
132%
150%
162%
111%
44%
40%
57%
53%
112%
38%
27%
23%
24%
65%
27% 34
%
12%
32%
73%
23%
17%
107%
44%
26%
106%
73% 75%
140%
77%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Ger
man
y
Japa
n
UK
USA
Bulg
aria
Cze
ch
Egyp
t
Hun
gary
Isra
el
Kaza
khst
an
Pola
nd
Rom
ania
Rus
sia
S Af
rica
Turk
ey
Ukr
aine
Arge
ntin
a
Braz
il
Chi
le
Col
ombi
a
Mex
ico
Chi
na
Indi
a
Indo
nesi
a
Mal
aysi
a
Philip
pine
s
S Ko
rea
Taiw
an
Thai
land
DEVELOPED EMERGING EUROPE AND SOUTH AFRICA LATIN AMERICA EMERGING ASIA
5Refer to important disclosures on pages 32
Deposit Penetration: Total Deposits as a Percentage of GDP (%)
114%
98%
131%
46%
43%
67%
97%
42%
126%
24% 34
%
27%
18%
76%
33%
32%
27% 30%
59%
28%
27%
158%
62%
40%
129%
64% 69
%
169%
89%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Ger
man
y
Japa
n
UK
USA
Bulg
aria
Cze
ch
Egyp
t
Hun
gary
Isra
el
Kaza
khst
an
Pola
nd
Rom
ania
Rus
sia
S Af
rica
Turk
ey
Ukr
aine
Arge
ntin
a
Braz
il
Chi
le
Col
ombi
a
Mex
ico
Chi
na
Indi
a
Indo
nesi
a
Mal
aysi
a
Philip
pine
s
S Ko
rea
Taiw
an
Thai
land
DEVELOPED EMERGING EUROPE AND SOUTH AFRICA LATIN AMERICA EMERGING ASIA
Source: Central Bank Data, Merrill Lynch estimatesNote: Most data end-2005, some end 2004, some ML estimates
6Refer to important disclosures on pages 32
Too much surplus liquidity
Source: CBC, TEJ
NCD Outstanding vs Deposit Ratio
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
2006
/01
2006
/07
NT$bn
-
1.00
2.00
3.00
4.00
5.00
6.00%
CBC CD Outstanding (L) 1-year Deposit Rate (R)
7Refer to important disclosures on pages 32
Consumer credit outgrow corporate loans
Source: Central Bank Data, Merrill Lynch estimates
Loan growth
-15%-10%-5%0%5%
10%15%20%25%30%
1994
/0519
94/12
1995
/0719
96/02
1996
/0919
97/04
1997
/1119
98/06
1999
/0119
99/08
2000
/0320
00/10
2001
/0520
01/12
2002
/0720
03/02
2003
/0920
04/04
2004
/1120
05/06
2006
/0120
06/08
Corporate Individuals Total
0 2,000 4,000 6,000 8,000
10,000 12,000 14,000
1997/1
2199
8/07
1999/0
2199
9/09
2000/0
4200
0/11
2001/0
6200
2/01
2002/0
8200
3/03
2003/1
0
2004/0
5200
4/12
2005/0
7200
6/02
2006/0
9
NT$bn
Corp Loan car Loan Unsecured personal loan Mortgage
8Refer to important disclosures on pages 32
Margins remain thin
Source: CBC, Merrill Lynch
0
2
4
6
8
10
12
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Taiw an CBC Rediscount Rate US Fed Funds Rate
Benchmark rate gap between TW and US
2
2.2
2.4
2.6
2.8
3
3.2
3.4
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
%
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0%
Interest Spread (L) New Loan Rate (R)
9Refer to important disclosures on pages 32
Three areas to grow•Wealth management
•Treasury products
•Overseas operations
Non-loan income to operating revenue
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Hon
g K
ong
Aus
tral
ia
Mal
aysi
a
Sin
gapo
re
Indi
a
Phi
lippi
nes
Tha
iland
Tai
wan
Sou
th K
orea
Indo
nesi
a
Source: Company reports, Merrill Lynch
10Refer to important disclosures on pages 32
Non-loan business gaining importance
TW Bank: Net Fee/Op Revenue
0%
4%
8%
12%
16%
20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
3M06
% 1997 2000 2003 2005Chinatrust 31% 25% 24% 29%FEIB 8% 13% 21% 29%Taipei Fubon 8% 9% 34% 34%Hsinchu Bank 8% 8% 13% 25%Cathay United 6% 7% 15% 20%Taishin Bank 17% 24% 22% 20%IBTAIPEI 5% 8% 12% 22%Bank SinoPac 10% 13% 15% 23%ICBC 15% 17% 19% 18%TBB 7% 7% 14% 20%C.H.B 8% 8% 11% 13%First Bank 9% 10% 12% 15%E.Sun Bank 9% 12% 16% 18%
11Refer to important disclosures on pages 32
Taiwan households hold US$1.3tn assets
Cash, 41%
Stock, 31%
Mutual/Trust fund,7%
Life insurance, 11%
Bond, 1%
Others, 9%Asset allocation in cash & deposit
Taiwan: 41%
USA: 30%
Source: Central Bank, CEIC
12Refer to important disclosures on pages 32
Wealth Management & FX/Derivatives
Sources: Company Data, Merrill Lynch estimates
Trust Assets Share Share Share Share(NT$bn) 2000/12 2002/12 2004/12 2005/12 2000/12 2002/12 2004/12 2005/12
1 Chinatrust 41 96 511 619 6.5% 7.9% 22.3% 22.4%2 First Bank 57 122 205 226 9.0% 10.1% 8.9% 8.2%3 Citibank N.A. 92 152 153 176 14.7% 12.5% 6.7% 6.4%4 CTC 53 102 135 157 8.5% 8.4% 5.9% 5.7%5 ICBC (Mega FHC) 25 91 122 156 4.0% 7.5% 5.3% 5.7%6 Taishin Bank 17 51 120 138 2.7% 4.2% 5.3% 5.0%7 Taipei Fubon Bank 1 17 49 122 0.2% 1.4% 2.1% 4.4%8 Cathay United Bank 1 13 82 120 0.2% 1.1% 3.6% 4.4%9 HNCB 9 26 67 77 1.4% 2.1% 2.9% 2.8%
10 Bank SinoPac 15 41 59 61 2.3% 3.4% 2.6% 2.2%11 C.H.B 11 22 45 51 1.8% 1.8% 2.0% 1.9%12 IBTAIPEI 1 5 44 66 0.2% 0.4% 1.9% 2.4%13 TC Bank 5 19 35 36 0.8% 1.6% 1.5% 1.3%14 E.Sun Bank 7 12 28 38 1.1% 1.0% 1.2% 1.4%15 Asia Trust 33 31 30 30 5.3% 2.6% 1.3% 1.1%
13Refer to important disclosures on pages 32
FX – With Customers
Sources: Company Data, Merrill Lynch estimates
FX-with Customers Share Share Share Share(NT$bn) 2000 2002 2004 2005 2000 2002 2004 2005
1 Chinatrust 24 28 118 152 4.5% 3.7% 8.6% 12.4%2 ICBC (Mega FHC) 28 29 61 89 5.2% 3.9% 4.5% 7.2%3 HNCB 26 24 45 51 4.9% 3.2% 3.3% 4.1%4 Taishin Bank 5 17 41 37 0.9% 2.2% 3.0% 3.0%5 First Bank 24 22 29 32 4.5% 2.9% 2.1% 2.6%6 C.H.B 21 17 26 28 3.9% 2.3% 1.9% 2.3%7 Taipei Fubon Bank 8 8 17 30 1.6% 1.1% 1.2% 2.5%8 Bank Of Taiwan 19 16 23 25 3.5% 2.1% 1.7% 2.1%9 Taipei Fubon Bank 8 8 17 30 1.6% 1.1% 1.2% 2.5%
10 Bank SinoPac 9 15 37 22 1.7% 2.0% 2.7% 1.8%11 E.Sun Bank 3 3 18 26 0.5% 0.4% 1.3% 2.1%12 CTC 8 7 15 20 1.4% 0.9% 1.1% 1.6%13 CTB 9 8 16 18 1.8% 1.1% 1.2% 1.5%14 TBB 11 8 13 14 2.0% 1.1% 1.0% 1.2%15 IBTAIPEI 3 4 8 11 0.6% 0.6% 0.6% 0.9%
14Refer to important disclosures on pages 32
OBU growing fast
Sources: Company Data, Merrill Lynch estimates
Note: OBU contribution in 2005 increased was mainly because of more provisioning in 2005. if taking out the extra provisioning, the contribution from OBU was < 20%
0
5,000
10,000
15,000
20,000
25,000
30,000
1998 1999 2000 2001 2002 2003 2004 2005
NT$mn
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
OBU pretax profit % to banks prtax earnings
15Refer to important disclosures on pages 32
Taiwan corporate investing the most to China (HK + China already 41%)
TW-China supervision MoU not signed
Taiwan export amounts
0
20
40
60
80
100
120
140
160
180
200
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
US$bn
USA Japan HK China Korea Europe Other
16Refer to important disclosures on pages 32
Taiwan is the biggest FDI in Vietnam
0
50
100
150
200
250
300
350
400
450
2002 2003 2004 2005 8M2006
US$mn
Taiwan direct investment in Vietnam
13% of Vietnam foreign direct investment comes from Taiwan in 2002-Aug06
17Refer to important disclosures on pages 32 1
Taiwan financial institutions landscape
____________________Non-classified financial institutions (e.g. China Development, Waterland FHC) not includedFigures in blue represent market cap in NT$ bn. Figures in green represent price-to- 1H06 book value ratios. Figures in grey represent FHC market cap in NT$ bn and FHC price-to-1H06 book ratio. Figures in red represent reported NPLs (%)Source: BOMA, Bloomberg, CBC, Taiwan Stock Exchange, SITCA. Assets and NPL ratios as of Sep 2003 and Dec 2003, respectively. Market cap data as of March 26, 2004(1) As of January 2004(2) Year 2005
0
500
1,000
1,500
2,000
2,500
3,000
Total AssetsNT$ bn
Life Insurance
Market Share of AUM
Banks
0%
2%
4%
6%
8%
10%
% of TotalTrading Volume
Securities
Increasing consolidation expected; led by Yuanta and Fubon
$751.2x
$1111.2x $22
1.1x$250.8x
$441.1x
$244.5x $16
1.0x
$911.3x
$2161.4x
$170.9x
0%
2%
4%
6%
8%
Asset Managers
Foreign competition increasingCurrently overpricedNo single company big enough to deliver transforming transaction
Mid-sized private banks likely to lead to consolidation
Government-related Banks New Private Banks FHCOld Private Banks
Larger banks are largely government controlled
$441.1x
Reported NPLs (%)
$2581.4x
1.5x$26
1.6x$141
$961.2x
$1982x
$1271.4x
$651.6x
$2161.4x
$270.9x
1.0x$21 $24
1.2x$100.9x 5x
$9
$911.3x
0.2x$3
0.6x$6
Life Insurance dominated by Cathay Group
Remaining life insurers are small and some are capital constrained
AIG-owned
$2701.9x $12
1.5x
$622.2x
$4613.4x
$241.6x
$2701.9x
Remaining P&C insurers are small and some are capital constrained
P&C Insurance
1.6x$4
3.4x$461
1.4x$6
1.6x$246
P&C Insurance dominated by Fubon
(1)
$1271.5x
$5913.1x
1.38 2.59 0.5 2.4 2.15 1.65 1.94 1.87 2.08 2.59 2.9 2.36 1.04 1.34 2.68 2.6 2.38 3.23 3.42 2.51 4.86 2.38 5.76 1.21 2.98 3.21 1.76 2.31 9.61 1.48 9.69 18.8 1.79
(2)
$1322.0x
0
50
100
150
200
250
300
350
400
Catha
y FHC
Nan S
han
Shin K
ong
FHC
China
Post O
ffice
ING A
etna
Fubon
FHC
Presid
ent A
llianc
e
Mer
curie
s Life
China
Life
Prude
ntial
2005 PremiumIncome NT$ bn
0
22
45
Fubon
FHC
Ming
Tai
Union
Catha
y FHC
Centra
l
Taian
Zurich
Meg
a FHC
Newa
2005 Direct WrittenPremium NT$bn
3.2 0.5x
$2161.4x
5.8 0.9x
258 1.4x
591 3.1x
141 1.9x
2161.4x
1.2x$111
1.2x$17
0.8x$15 $14
0.7x $1380.9x
18Refer to important disclosures on pages 32
Mortgage loan market share
Sources: Company Data, Merrill Lynch estimates
Mortgage Loan Share(NT$mn) 2000/12 2002/12 2004/12 2005/12
1 Land Bank 14.9% 13.4% 11.4% 10.9%2 Chinatrust 3.9% 6.2% 7.4% 7.8%3 TCB Bank 11.1% 9.5% 7.0% 6.7%4 Cathay United Bank 3.4% 3.0% 5.6% 6.1%5 Taipei Fubon Bank 4.5% 3.9% 2.9% 4.8%6 First Bank 4.6% 4.7% 5.0% 4.6%7 HNCB 4.1% 5.4% 5.1% 4.7%8 Taishin Bank 2.4% 4.1% 4.7% 4.6%9 Bank Of Taiwan 5.5% 4.9% 4.1% 4.3%
10 Bank SinoPac 2.5% 3.3% 3.6% 4.1%
19Refer to important disclosures on pages 32
Taiwan vs Korea: top 5 market share
Source: Merrill Lynch estimates
Assets Loans
KB 16% 21%
SFG 13% 15%
WFG 11% 14%
Hana 10% 9%
KEB 6% 6%
Top 5 marekt share 56% 65%
South KoreaTaiwan Loans AssetsLand Bank 8% 6.2%Bank Of Taiwan 8% 8.9%Taiwan Cooperative Bank 8% 6.9%Hua Nan Bank 6% 5.8%Chang Hwa Bank 5% 4.6%Top 5 market share 34% 32%
20Refer to important disclosures on pages 32
Private banks growing fast but still small
Loan Market Share Loan grwoth
1997/12 2000/12 2005/12 1997-2005 CAGR
Land Bank 8.2% 7.7% 7.9% 5.0%
Bank Of Taiwan 11.2% 9.6% 7.9% 0.9%
TCB Bank 9.1% 8.2% 7.5% 2.9%
HNCB 5.5% 5.4% 5.6% 5.6%
C.H.B 5.1% 5.2% 5.0% 5.1%
First Bank 5.7% 5.7% 5.3% 4.5%
Chinatrust 2.8% 3.3% 5.1% 13.4%
TBB 5.0% 4.5% 4.3% 3.4%
ICBC 2.5% 3.3% 3.9% 11.7%SinoPac+IBT 2.6% 3.3% 3.6% 10.3%
Cathay United Bank 2.6% 2.9% 3.7% 20.4%
Taishin Bank 1.1% 1.3% 3.3% 7.0%
Taipei Fubon Bank 2.9% 2.6% 3.3% 4.1%
Farmers Bank 3.0% 2.4% 2.7% 3.6%
CTB 3.0% 2.9% 2.6% 15.7%
Government Bank 58.1% 54.9% 52.7% 4.4%
Private Bank 12.1% 13.5% 19.0% 10.4%
Total 100.0% 100.0% 100.0%
Source: TEJ, Merrill Lynch
Valuation more reasonable: from ~2x book to ~1.4x book
Foreign interests in Taiwan
MoF initial plan and rules
1) Reduce market share of government-controlled bank (in terms of assets) from 50% to 25%-30%
2) Open up to foreign financial groups
21Refer to important disclosures on pages 32
Government initiativesProduct competitiveness: - how to compete with HK and Singapore
Encourage industry consolidation - why not copy a DBS model in Taiwan - friendly takeover vs. hostile takeover - transparency requirement - who should have independent boards - how to make privatization process better
Incentive for money and talents to stay - tax reform - incentive and compensation program - friendly environment
Follow clients overseas - Vietnam: Taiwan banks expanding - China: indirect
22Refer to important disclosures on pages 32
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