VZCZCXRO1670
RR RUEHGH
DE RUEHIN #1963/01 2400607
ZNR UUUUU ZZH
R 280607Z AUG 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6549
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3800
RUEHBJ/AMEMBASSY BEIJING 7176
RUEHUL/AMEMBASSY SEOUL 8853
RUEHGP/AMEMBASSY SINGAPORE 6978
RUEHKO/AMEMBASSY TOKYO 9017
RUEHML/AMEMBASSY MANILA 0129
RUEHJA/AMEMBASSY JAKARTA 4122
RUEHKL/AMEMBASSY KUALA LUMPUR 3802
RUEHHI/AMEMBASSY HANOI 3374
RUEHBY/AMEMBASSY CANBERRA 4580
RUEHWL/AMEMBASSY WELLINGTON 1854
RUEHHK/AMCONSUL HONG KONG 8430
RUEHGH/AMCONSUL SHANGHAI 1313
RUEHGZ/AMCONSUL GUANGZHOU 0496

UNCLAS SECTION 01 OF 02 TAIPEI 001963 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP 
TREASURY FOR OASIA/TTYANG 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI 
BOLIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Big Taiwan State-owned Banks to Merge 
 
REF: (A) TAIPEI 336 
 
¶1.  SUMMARY:  Taiwan announced a three-year plan to merge the 
operations of the three largest state-owned banks into one financial 
holding company.  The world ranking of the new firm's banking unit 
will move up to 89th, and its market share in Taiwan will increase 
to 18%, well ahead of the next largest bank's share of less than 
10%.  The plan is a step forward, but it will not reduce the public 
sector's control of the financial sector.  One wonders if this new 
entity will keep its world ranking for long if it remains a 
state-owned enterprise.  END SUMMARY. 
 
Bank Consolidation Plan Gets the Green Light 
-------------------------------------------- 
 
¶2.  On August 15, the Executive Yuan formally approved a three-stage 
financial consolidation plan submitted by the Ministry of Finance 
(MOF).  The plan calls for the MOF to set up by the end of this year 
a new state-owned entity called Taiwan Financial Holding Company 
(TFHC), which will comprise three state-owned banks - Export-Import 
Bank of China (EIB), Land Bank of Taiwan (LBT), and Bank of Taiwan 
(BOT).  In July, BOT had already merged with another state-owned 
bank, Central Trust of China (CTC) (reftel).  As part of the 
reorganization, TFHC will set up two subsidiaries, one transformed 
from CTC's life insurance department and the other a merged CTC and 
BOT securities operation.  The three banks, however, would initially 
be managed independently. 
 
¶3.  Prior to the end of 2009, however, BOT will merge with EIB, with 
the new entity still called BOT.   EIB's insurance department will 
be split off and merged into the TFHC's insurance subsidiary.  LBT's 
securities department will merge into TFHC's new securities firm. 
By the end of 2010, the enlarged BOT will merge with LBT, with the 
new entity's name remaining BOT. 
 
¶4.  As part of the plan, the MOF guaranteed the 14,200 bank 
employees there would be no layoffs for at least three years.  These 
employees have seen themselves as civil servants, but after the 
reorganization, TFHC operations will no longer be regulated by the 
budget, and civil service rules and regulations will no longer 
apply.  Salary caps will be removed for top managers for example. 
Government bureaucrats are hoping that the new entity will operate 
more like a private company. 
 
One of the World's 100 Largest Banks 
------------------------------------ 
¶5.  The MOF projects that after the merger, TFHC's new banking 
entity will, in terms of assets, be ranked 89th in the world.  This 
puts it larger than Singapore's United Overseas Bank (ranked 102nd), 
but still smaller than South Korea's Shinhan Bank (ranked 82nd). 
The new banking entity's assets will increase to US$158.8 billion, 
and it will have 308 branches, including 16 overseas.  Its market 
share in terms of loans and deposits will rise to 19%, far higher 
than any other bank in Taiwan, the next largest having market share 
of below 10%. 
 
Is Bigger Better? 
----------------- 
 
¶6.  The MOF asserts the planned merger will reduce costs and 
increase efficiency.  The firms will also bring different strengths 
to the new bank.  CTC, prior to July, was Taiwan's sole insurance 
provider to public employees and the major public procurement 
contractor.  BOT is the leader in corporate banking and foreign 
exchange services, and LBT is the largest in the mortgage, real 
estate trust, and securitization service supplier.  EIB specializes 
in financial services for overseas trade and investment.  The merged 
 
TAIPEI 00001963  002 OF 002 
 
 
institution should continue to dominate all of these sectors. 
 
Or Just Bigger? 
--------------- 
 
¶7.  Some financial observers in Taiwan have expressed concern that 
TFHC will become a new financial giant that banks will have 
difficulty competing with.  One analyst of a foreign bank disagreed, 
however, noting that he expected the larger state-owned entity to be 
just as inefficient as the banks it absorbed. 
 
COMMENT 
------- 
 
¶8.  This plan is a political compromise and it shows.  By not 
privatizing the institutions and guaranteeing no layoffs, much of 
the political opposition was removed, allowing the consolidation to 
move forward.  It may also, however, have removed the chance for the 
new bank to compete on an equal footing with its rivals.  It will 
indeed be bigger, but it is unlikely to outmaneuver nimble 
non-government competitors who will also be seeking to serve an 
increasingly discerning market. 
WANG