Citibank announced on April 9 that it will acquire Bank of Overseas Chinese (BOOC), a small Taiwanese lender. The management of BOOC agreed to the deal after a year of negotiations.
According to the US-based bank, Citibank will pay approximately $427.3m for BOOC, subject to closing adjustments. The acquisition will increase Citibank's branches in Taiwan from its existing 11 to 66 once the merger is complete. The combined operation will have assets of around $22.8bn and it will be the 13th largest bank by total assets in Taiwan. The transaction brings over 1m clients to Citibank.
This acquisition will mark only the second complete buy-out by a foreign bank after Standard Chartered bought Taiwan's Hsinchu International Bank for $1.2bn last year. The British bank increased its network from 3 branches to 86.
Citigroup is the world's largest financial service group and has been operating in Taiwan for 43 years. Citi Taiwan's country officer Morris Li said that capital markets and wealth management are the major focus for Citi.
Wayne Pai, CEO of Polaris Financial Group, which has a 40% stake in BOOC, said BOOC shareholders welcomed the acquisition because smaller banks are being marginalised and competition was fierce due to increasingly diversified products.
The expansion comes as Taiwan is still recovering from a credit card crisis, which caused banks to write off debts of $3bn in 2006. Industry observers suggest this is a good time to acquire a banking network, as the market is still somewhat depressed.
Taiwan's financial regulator, the Financial Supervisory Commission (FSC), reported that overdue credit card loans fell to 2.27% in January this year from 2.75% a year earlier. Bad loans at Taiwan banks dropped to 2.28% of the total, a significant improvement from the high of 11.74% in early 2002.
Taiwan is encouraging overseas investment and local mergers to shore up the financial industry.
"We expect the mergers and acquisitions to most likely involve small banks, ones that seriously suffered from the consumer non-performing loans issue and now suffer from a lack of growth prospects after the bursting of the consumer-lending bubble," stated a January report by US investment bank, Lehman Brothers.
The merger still needs approval from all of BOOC's shareholders and from the FSC, which is thought to be a formality.
The government prevents local banks from operating in China. Many analysts believe that Taiwanese banks would do very well in China, due to close language and cultural ties. Additionally, over 1m Taiwanese people live and do business in China.
Foreign banks that buy Taiwanese banks would be able to serve customers in both Taiwan and in China, giving them a crucial advantage over Taiwanese banks that lose out on this market of expatriate Taiwanese.
More bank consolidations may be on the horizon.
The local press reported on April 9 that First Commercial Bank (FCB) is planning to merge with Taiwan Business Bank (TBB). FCB has assets of around $48.48bn and TBB has assets of around $30.3bn. Combined, these banks would account for 10% of the local market share. The combined number of branches would total 311.