Taiwanese banks mired in difficult operating environment as cross-Strait ties remain challenging

The cancelled deal between CTBC Financial Holdings and China CITIC Bank speaks volumes.

The cancellation of the deal between CTBC Financial Holdings and China CITIC Bank in late August is suggestive of the increasingly difficult operating environment faced by Taiwanese banks as cross-Strait ties continue to remain challenging, says BMI Research. "We believe that the operating environment will remain difficult as the Cross-Strait Service Trade Agreement (CSSTA) that would have led to a liberalisation of the financial sector, remains stalled in parliament."

Here's more from BMI Research:

Furthermore, cross-Strait ties are unlikely to improve significantly, with Taiwanese President Tsai Ing-wen refusing to acknowledge the 'One China' principle (where both China and Taiwan agree that there is One China but both have different ideas as to what constitutes China) as the basis for conducting cross-Strait relations.

In addition, the domestic operating environment will also present headwinds, with the highly saturated nature of Taiwan's domestic banking industry having put a cap on profitability. Taiwan has approximately 40 lenders serving a population of 23mn, with the top five lenders having a collective market share of about 38.0%, which is in stark contrast to South Korea where the top five banks hold a market share of 80.0%.

Consequently, intense competition has resulted in razor-thin profit margins of 1.4% in Q116, which has in turn inhibited organic growth of banks. We therefore see scope for banks to look into alternative avenues of growth in a bid to boost profits, a move which is likely to be positive for the development of fintech in the economy.