US embassy cable - 05TAIPEI1878

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001878 
 
SIPDIS 
 
STATE PASS AIT/W AND USTR 
STATE FOR EAP/RSP/TC, EAP/EP, EB/IFD/OIA 
USTR FOR SCOTT KI 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS, 
AND SAN SRANCISCO FRB/TCURRAN 
 
E.O. 12958: DECL: 04/19/2025 
TAGS: ECON, EFIN, PINR, TW 
SUBJECT: BABY STEPS TOWARD TAIWAN BANK CONSOLIDATION 
 
REF: A. TAIPEI 1413 
 
     B. TAIPEI 1797 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D 
 
1.  (SBU) Summary: The announcement on April 19 of a merger 
plan approved by the boards of both Shinkong Financial 
Holding Corporation and Macoto Bank is a small step toward 
much needed bank consolidation in Taiwan, and one that 
government and investment bankers alike hope will serve as a 
catalyst for additional bank mergers.  Foreign bankers in 
Taiwan downplay the significance of the merger since there 
are no plans to close any existing bank branches, and remain 
more focused on the still-uncompleted sale to a foreign 
consortium of a controlling share in the much larger 
state-owned Changhwa Commercial Bank (ref A).  End summary. 
 
2.  (U) According to media reports, Shinkong (standard 
pinyin: xin guang) Finance, Taiwan's seventh largest 
financial holding company announced on April 19 a plan to 
acquire Taiwan's privately owned and unlisted Macoto 
(standard pinyin: cheng tai; the Japanese name 8Macoto8 
translates into English as &honest8) Bank through a share 
swap valued at over US$633 million.  Macoto has the tenth 
largest bank network in Taipei, ahead of better known 
TAIEX-listed private sector banks such as Taishin and 
Chinatrust.  Macoto is sometimes described as a regional bank 
with operations concentrated in northern Taiwan.  It 
currently has 81 branches including 29 branches in Taipei 
City, 16 branches in the surrounding suburbs, and one in Hong 
Kong.  Acquisition of Macoto's network will bring Shinkong,s 
branches up to 108 and make it the fifth largest private 
sector bank in Taiwan.  Shinkong derives about 90 percent of 
its revenues from its life insurance business and it is 
currently looking to expand its life insurance operations to 
China. 
 
3.  (C) Mergers and acquisitions are a hot topic in Taiwan's 
banking community as the government continues toward its 
second stage financial reform goals of reducing the number of 
financial holding corporations and reducing the number of 
state-owned banks.  Merger fever was heightened when 
President Chen Shui-bian announced last year an ambitious 
goal to halve the number of state-owned financial firms to 
six by the end of 2006.  Vice Premier Wu Rong-yi highlighted 
the Chen Administration's desire to move forward on the 
second stage financial reform goals in a meeting with AIT on 
April 13 (ref B).  Kong Jaw-sheng told AIT on April 12 that 
Taiwan would press ahead with bank consolidation this year. 
 
4.  (SBU) For a while, several banks in Taiwan were talking 
about consolidation with rivals.  At the end of 2004, 
financial mergers and acquisitions were billed as one of the 
hot equity plays in the region.  However, lower-than-expected 
bids in the closely watched contest between a consortium led 
by Dutch bank ING and a consortium led by Japan's Shinsei 
Bank for control of Changhwa Bank has stalled selection of a 
bid winner.  The two consortia offered bids on March 18 for a 
controlling stake in Changhwa, but negotiations are still 
ongoing, and an announcement of the bid result is not due 
until sometime in June 2005. 
 
No Help for Taiwan's Over-banking Problem 
----------------------------------------- 
 
4.  (SBU) Comment: Taiwan's 48 lending banks serve a 
population only half South Korea's, which has fewer than half 
the number of banks.  This problem of &overbanking8 limits 
the profitability of all banks operating in Taiwan. 
Shinkong,s acquisition of Macoto will not remove excess 
capacity from the banking system since there is no plan to 
close any of Macoto's 81 branches.  However, it should make 
Shinkong banking operations much stronger, more able to 
compete as in the East Asia region, and that is a positive 
step towards the announced goals of a stronger banking 
sector. Shinkong's attempt to enter the China market as an 
insurance company may provide a back door for Taiwan 
companies to sell financial products in China even without an 
MOU on bank supervision. 
 
5.  (SBU) Some analysts have suggested Shinkong is paying too 
much for Macoto and shares of Shinkong have fluctuated since 
the merger announcement, but a Morgan Stanley executive told 
AIT that the share exchange rate between Shinkong and Macoto 
is reasonable because of Macoto's well-developed credit card 
business and its new IT systems.  The executive also noted 
that the two Shinkong and Macoto are a good match for each 
other with little overlap in their current operations.  In 
order to encourage consolidation, Taiwan stopped issuing new 
branch licenses over a year ago, forcing expansion-minded 
financial companies to grow by acquiring existing branches. 
A State Street Bank executive played down the significance of 
the merger since it involved only local banks. End comment. 
PAAL