M&A by Foreign Financial Institutions

UNCLAS AIT TAIPEI 003595

SIPDIS

INFO USDOC WASHDC
AMEMBASSY BANGKOK
AMEMBASSY BEIJING
AMEMBASSY SEOUL
AMEMBASSY SINGAPORE
AMEMBASSY TOKYO
AMEMBASSY MANILA
AMEMBASSY JAKARTA
AMEMBASSY KUALA LUMPUR
AMEMBASSY HANOI
AMEMBASSY CANBERRA
AMEMBASSY WELLINGTON
AMCONSUL HONG KONG
AMCONSUL SHANGHAI
AMCONSUL GUANGZHOU
DEPT OF TREASURY WASHDC

SIPDIS, SENSITIVE BUT UNCLASSIFIED

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/TC, EAP/EP

USTR FOR ALTBACH

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: M&A by Foreign Financial Institutions


SUMMARY
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1. London-based Standard Chartered Bank (SCB) recently announced it
will totally acquire Taiwan's Hsinchu International Bank (HIB) in
October 2006 by purchasing equity shares in Taiwan's stock market.
A dozen foreign investors have acquired significant equity in six
Taiwan banking institutions through private placement so far this
year, and several other merger and acquisition (M&A) deals for
Taiwan banks involving foreign investors are under negotiation.
Taiwan officials claim that it's the low prices and good quality of
local banks that attract foreign investors, but the links to
China-based Taiwan-invested companies certainly adds to the appeal.
End summary.

First Acquisition through Stock Market Trading
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2. In late September 2006, SCB obtained permission from Taiwan's
Financial Supervisory Commission (FSC) to acquire HIB through open
trading at a price of NT$24.5 (74 US cents) per share in Taiwan's
stock market in October. SCB hopes to obtain 100% ownership in HIB
and subsequently de-list HIB from Taiwan's stock market. However,
SCB will give up the acquisition plan if it fails to obtain over 51%
of HIB ownership prior to October 31. HIB ranks 27th among Taiwan
banks in terms of net worth and has 82 local branches.

Significant Foreign Interest in Taiwan Banks
--------------


3. In 2006 prior to SCB's acquisition announcement, 12 major
foreign investors have acquired significant equity in six Taiwan
banking institutions through private placement, according to the
Banking Bureau. In January 2006, GE Consumer Finance (U.S.)
acquired 24.9% ownership in Cosmos Bank and has since participated
in operation of the bank and its 62 branches.


4. In March, New Bridge (U.S.) and Nomura Securities (Japan)
obtained a total of 23% ownership in Taishin Financial Holdings
(TFH). The major local shareholder (Thomas Wu) continues to control
and opeate TFH. Taishin International Bank, a TFH subsidiary,
operates 100 local branches and three overseas offices.


5. In March, Tamasek Holdings (Singapore) purchased 15% equity in

E. Sun Financial Holdings (ESFH). Major local shareholders continue
to operate ESFH whose subsidiary E. Sun Bank has 98 local branches
and two overseas offices.


6. In May, Shinsei Bank (Japan) obtained 42% ownership in Jih Sun
Financial Holdings (JSFH) and since then has installed its own line
managers in JSFH subsidiary Jih Sun International Bank, which has 35
local branches.


7. In June, Dai Ichi Mutual Life (Japan) obtained 6.5% ownership in
Shin Kong Financial Holdings (SKFH). Dai Ichi has provided SKFH
with sophisticated technologies under a strategic alliance
arrangement. SKFH subsidiary Shin Kong Commercial Bank has 107
local branches.


8. In September, eight foreign companies (including Singapore's CAM
Financial Holdings) committed to supply Huanan Business Bank (HBB,
which has negative net worth) with NT$5.3 billion (US$163 million)
of capital. The additional funding allowed HBB to avoid Central
Deposit Insurance Corporation takeover.

Cases under Negotiation
--------------


9. Four bank M&As involving foreign investors are under
negotiation. In September, Citicorp revealed its intention to
acquire equity in the Bank of Overseas Chinese (BOC) which ranks
33rd among Taiwan banks in net worth and has 54 local branches.
Deutsche Bank reportedly also intends to acquire equity in BOC.
HSBC has reportedly entered into negotiation for acquisition of
equity in Far Eastern Financial Holdings (FEFH) whose subsidiary Far
Eastern International Bank has 35 local branches and one overseas
office. Three U.S. banks have reportedly started negotiations on
acquisition of Taiwan's Chinese Bank which has a relatively poor NPL
ratio of about ten percent. Two U.S. banks have entered into
negotiations on acquisition of Taitung Business Bank whose net worth
is almost zero and which has an NPL ratio of 23% (one of the poorest
ratios among Taiwan banks).

Large Foreign Presence in Taiwan Banks
--------------


10. The average foreign ownership of banking institutions listed on
the Taiwan Stock Exchange has reached 22%. According to Banking
Bureau officials, foreign portfolio investors (mainly large mutual
funds) are attracted by the good quality of Taiwan banking
institutions. Taiwan bank's average NPL ratio remains below 2.5%
and their average capital adequacy ratio remains above 10%, higher
than the minimum 8% required by BASEL II. Another factor identified
by AIT contacts is that Taiwan bank share prices are one-third less
than their counterparts in Hong Kong. Another point of interest for
foreign banks is Taiwan's high level of wealth accumulation, which
offers a substantial market for asset management services. For
Taiwan's largest financial holdings, the percentage of foreign
ownership has reached 53.6% for ChinaTrust, 42% for both for E. Sun
and Jih Sun, 41.2% for Fubon, 38% for SinoPac, 35.7% for Cathay, 33%
for Taishin, 30.5% for Shin Kong, and 25% for Mega.

Comment
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11. In spite of delinquent credit/cash card debt problems that
eroded the profitability of banking institutions in Taiwan earlier
this year, Taiwan banks remain attractive to foreign investors. By
acquiring a Taiwan bank, foreign investors gain a built-in clientele
among the tens of thousands of Taiwan companies located in China.

Young