Taiwan lenders look beyond their borders – IFR Asia

IFR Asia, July 2009

Taiwanese banks, flush with cash, have become a useful source of funding to borrowers around the world. It’s a happy coincidence of interests: a source of revenue and loan growth for the banking sector, and a well of capital for overseas banks and companies starved of many of their usual funding outlets.

According to the Central Bank of the Republic of China, total loans outstanding among the overseas business units and branches of Taiwanese banks was NT$1.8 trillion in 2008: about 11% of total loans, and more significantly a 25% increase in value year on year. In the first quarter of 2009 year on year growth was 21%. This is a continuation of a trend that started around 2005 and shows no sign of ebbing.

“Talking to the banks, most indicate this is one area they want to grow,” says Matthew Smith, a banking analyst at Macquarie Research in Taipei. “It’s the only real lending stream they have now that pays – there’s so much liquidity here in Taiwan, and the interest rates and spreads are so low that it is almost not economically profitable to lend in NT$,” he says. “Certainly it’s difficult to generate high return on equity without ramping up the risk curve and getting yourself into trouble. One way around that is to expand overseas lending, and especially US$ lending, which has better spreads and is more profitable.”

So, for example, when Bank of Queensland raised $295 million in a syndicated loan last August, its mandated lead arrangers included Chinatrust, First Commercial Bank and Taiwan Cooperative Bank. When the Finnish telecommunications and electronics component supplier Perlos Oyj went to the markets for $145.8 million a month later, its lead arrangers were almost entirely Taiwanese: Chang Hwa, Chinatrust, Land Bank of Taiwan, Mega Bank, Taishin International, Taiwan Cooperative, and First Commercial.

More recently, Colon Container Terminal, a Panamanian borrower, raised $96 million in June, with an entirely Taiwanese arranger group: Cathay United Bank, First Commercial, Mega, Taiwan Business Bank and Taiwan Cooperative. Other examples of companies that have raised funds in loans that are at least jointly lead arranged by Taiwanese banks include Dynamic Apex Macao Commercial Offshore, CRCI of Thailand, PT Astra Sedaya Finance of Indonesia, Hannstar Board Holdings from Hong Kong, the Thai arm of Maxis International, Vietnam’s Phuc Son Cement (in a $73 million leveraged deal in April, sole led by Mega International Commercial Bank), Hong Kong’s Masstop Asia Pacific, and the USA’s Meade Instruments.

The Phuc Son deal, for example, is believed to have paid Mega 300 basis points over costs, far more than the bank could expect on domestic deals. And the deals above only highlight the leads: the Bank of Queensland deal, for example, involved a total of 13 Taiwanese institutions at some level in the structure. More and more Australian borrowers are considering Taiwanese lenders as a specific target when they arrange funding; the same has recently been true of India too. Reliance Industries’ US$1.2 billion five-year bullet loan, signed last August, included Chinatrust as an arranger, with Bank of Taiwan, First Commercial Bank, E.Sun Commercial Bank and Hua Nan Commercial Bank all in general syndication. The facility paid a top level all-in fee of 151 basis points over Libor.

The push overseas seems to be taking place across the board. Private sector names like Mega, Cathay and Chinatrust are all growing strongly, but so are government banks: Taiwan Cooperative, for example, which is 100% state-owned. Many Taiwanese banks are expanding their branch network overseas: Mega, for example, has branches in four US cities, two in Panama, and others in Paris, Amsterdam, London, three Australian and two Japanese cities, Ho Chi Minh City, Singapore, Labuan, Hong Kong and (representative offices) Bahrain and Mumbai. That said, in many cases the actual loan participation takes place in an overseas business unit that is run from the bank’s own Taipei head office.

While these deals generate useful revenue, there is a question too. How much do Taiwanese banks really know about the credit of a Finnish telco supplier or a Panamanian container group? “In Taiwan there’s a question to what extent they are mispricing risk,” says Smith. “So far we haven’t seen it: the NPLs for offshore businesses have not picked up, with the exception of US subsidiaries.” Many of the loans that appear in CBC data would actually be to the overseas arms of Taiwanese corporations: an example is the $220 million loan to Nan Ya Plastics (HK). Clearly that sort of loan is not a cause for concern. But necessarily, loans further afield stretch the degree to which banks can know their clients. “Risk management is the key question,” Smith says.