On January 4, two subsidiaries of Rebar Asia Pacific Group filled for bankruptcy protection, triggering a bank run on an affiliated bank. This has highlighted corporate governance concerns, in a sector where many investors see potential, and could increase the pace of regulatory reform.
Customers who held deposits with Chinese Bank, part of the Rebar group, withdrew around $500m in one day according to the local press, panic stricken by the news of its parent company. The government reacted swiftly and took control of the bank. In a joint press conference the governor of the central bank, the finance minister and the chairman of financial service commission (FSC), assured the public that their money was safe as it was now considered a national bank following the takeover by the state- run central deposit insurance corporation.
It was reported on January 23 by the Chinese press that the FSC intends to bring the deadline for the filing of listed company accounts forward by a month, to March. This reduction of the “financial window” between the year end and the filing of accounts is aimed at improving financial reporting standards and bringing them closer to international standards. In the US, Hong Kong and Singapore the authorities require annual reports to be publicised within 90 days while in the US, companies with a market capitalisation of over $75m, only have 60 days.
Before this could take affect, a change to the securities transaction law, which could take time, would need to be made. Many institutional investors feel that this on its own would not go far enough and suggest, according to reports, that listed companies should be required to publish preliminary results by the end of January.
Taiwan’s banking sector is the fourth largest in Asia. There are 43 banks in total. The sector, compared to its global peers, is overcrowded, with the government and large family holdings controlling much of it. Intense competition causes margins to be tight and the sector has suffered from loan defaults in the past.
However, the sector remains attractive to some foreign banks who anticipate consolidation. In September, Standard Chartered, focused on the emerging markets of Asia, Africa, the Middle East and Latin America, bought control of Hsinchu International Bank for $1.22bn, which was twice the local banks net asset value.
Standard Chartered reported that “By leveraging our international network and cross-border product capability, we will capture a greater share of Taiwan’s rapidly growing trade and investment flows.” They also saw potential in banking for small and medium sized businesses as well as wealth management.
The government hopes that foreign ownership of banks will help to encourage better corporate governance standards within the sector. International banks remain cautious about investing but the acquisition by Standard Chartered demonstrates the interest in the market. There is some speculation that Citibank is considering a bid for the Bank of Overseas Chinese.
Local banks are not permitted to operate in China and this is unlikely to change soon and almost certainly not before the presidential elections in 2008. A change to this would boast the market and could encourage one or two Taiwanese banks to become regional giants.
The Rebar financial debacle is unlikely to cause much disruption to the banking sector in the long term but it is hoped that it may help speed up banking reforms. Investors expect the suggested moves to bring financial reporting rules closer to international standards will be part of wider reforms.
