Kindred spirits

Citigroup chief Sandy Weill and Fubon’s Tsai family share the same business model. Will their alliance produce Asia’s biggest financial supermarket?

Citigroup chief Sandy Weill and Fubon’s Tsai family share the same business model. Will their alliance produce Asia’s biggest financial supermarket?

By Allen T. Cheng
September 2002
Institutional Investor Magazine

In March 1994 a few local friends threw a dinner party for Sanford Weill, who was visiting Hong Kong. The Wall Street financier, who had just acquired the U.S.'s largest insurer, Travelers Group, chatted amiably with the roughly 20 high-powered guests at an exclusive restaurant on the Peak. Among them was Hong Kong’s preeminent tycoon, Li Ka-shing, and members of the Kwok family of Sun Hung Kai Properties. Weill found few topics of common interest with the property barons. Then he happened to strike up a conversation with a reserved young man, Richard Tsai. “I told Sandy how we in Taiwan were planning to build these financial supermarkets,” says Tsai, 45, today co-vice chairman of Fubon Group, the Taiwanese financial conglomerate controlled by his family. “We had Taiwan’s largest general insurer and had just launched a bank and a securities house. I said we envisioned cross-selling to be our future. Sandy’s face brightened up. He liked the idea, and we talked for much of that evening.” Before they parted, Tsai recalls, Weill told him he “was going to report to Congress that there was a company in Taiwan that could do banking, insurance, securities and sell other financial services, and ‘Why can’t we in the U.S.?’”

Within a few years, of course, Weill was able to do all of those things, after the U.S. Congress repealed the decades-old Glass-Steagall Act separating investment and commercial banking. Travelers, which in 1994 already included Weill’s original expansion vehicle, Commercial Credit Corp., as well as insurer Primerica Corp. and its Smith Barney brokerage unit, bought Salomon Brothers in 1997 before merging with Citicorp in October of 1998 to form Citigroup, the huge diversified financial conglomerate whose creation pretty much obliterated what was left of Glass-Steagall. Meanwhile, Tsai, among other finance industry leaders, spent much of the 1990s lobbying the Taiwanese government to liberalize the island’s financial regulations. The results: In June of last year, the Legislative Yuan passed the Financial Company Holdings Act, a major regulatory change that for the first time allowed companies like Fubon to unite all of their disparate financial units under one parent and to cross-sell products across subsidiaries.

Neither man forgot their Hong Kong conversation. Weeks after finalizing the Citibank deal, Weill traveled to Taiwan to meet with Richard and other senior Fubon executives. Ng Wing-fai, a onetime Salomon Smith Barney investment banker in Hong Kong who is now a senior executive at Fubon, recalls a breakfast meeting in the coffee shop of Taipei’s exclusive Hotel Sherwood. “We all sat down and got coffee, and even before we had a chance to order breakfast, Sandy reached across the table to shake Richard’s hand and say, “Hey, remember we’ve been talking about doing business together. Let’s get that done.” Says another Citigroup executive who was there: “The relationship just sparked, just continued. I was very impressed.”

It took more than a year, but Sandy got his deal. In May 2000 Citigroup agreed to buy a 15 percent stake in Fubon for $850 million in cash and stock -- its second-biggest Asian investment behind its $1.2 billion outlay in 1998 for a controlling interest in Japan’s Nikko Securities Co. It was the first time a foreign firm had ever bought a major portion of a large Taiwanese financial institution. As a measure of Weill’s respect for Richard, his older brother and fellow vice chairman Daniel, 46, and their father, 74-year-old Fubon founder and chairman Tsai Wan-tsai, the deal differed from others that Citigroup has struck around the world. The Tsais retained a controlling 40 percent position. In contrast, Citi secured a controlling interest for its 25 percent Nikko position and complete control in its outright acquisition of Mexico’s Grupo Financiero Banamex-Accival. When Weill trekked to Taipei to announce the deal, the Tsais graciously introduced him to a family friend, newly elected President Chen Shui-bian.

What Citigroup got was an important strategic alliance with Taiwan’s second-largest financial conglomerate, much of which was renamed Fubon Financial Holding Co. in December of last year, with $13.8 billion in total assets (roughly $33 billion after a recent acquisition). Citigroup became the No. 2 shareholder in a company that runs the island’s biggest property and casualty insurer, its second-largest securities brokerage, fifth-ranking asset manager, eighth-leading life insurer and 20th-biggest bank. Combining these formidable market positions with Citibank’s already thriving Taiwanese banking operation and its parent’s deep pockets, the two aim to become the dominant financial services provider in Asia’s largest consumer finance market -- $800 billion in individual assets -- outside Japan.

“Over the past several years, Taiwan has been one of the fastest-growing businesses that we have. And we think that will continue,” says Stephen Long, head of Citi’s Asia Pacific corporate bank. “We’ve got lots of opportunities to work together with Fubon in lots of different areas. Taiwan is important to us.”

The Tsais, in turn, now have the cash to compete aggressively in all five of their core markets and the reach of a powerful global brand. Already Fubon is flexing its muscles. On August 8 the company announced that it would purchase TaipeiBank, Taiwan’s ninth-largest bank with the No. 1 retail share in the capital city, for $2.3 billion. The purchase catapulted Fubon Commercial Bank from the 20th-largest institution on the island to sixth, with $27 billion in assets.

But Fubon -- and Citigroup -- are looking beyond Taiwan. With a market capitalization of $7 billion (after the TaipeiBank acquisition), Fubon ranks as Asia’s ninth-largest financial institution. That’s still small compared with Asia’s two top banks, Hong Kong’s Hang Seng Bank (at $20.5 billion) and South Korea’s Kookmin Bank ($13.4 billion), but bigger than Hong Kong’s Bank of East Asia and Taiwan’s China Development Industrial Bank, according to a Merrill Lynch & Co. report.

Leveraging Citigroup’s huge Asian distribution network and Fubon’s insurance products, the two would like to extend their insurance business throughout Asia -- with China the top priority. Sharing a common language and culture with China, the Taiwanese company enjoys obvious advantages as it tries to exploit opportunities opened by deregulation. Both Citi Insurance -- as Citigroup’s insurance business is known outside the U.S. -- and Fubon have representative offices in China but won’t be eligible to apply for sales licenses until 2003. “We’re expected to plant the flag,” says Daniel.

As promising as the Citigroup-Fubon relationship is, there are many risks. A Taiwanese connection can also be a liability in building a Chinese business, as was demonstrated again this past summer. When Beijing and Taipei clashed over Taiwan’s future role, Chinese officials were so incensed that they held in abeyance a number of Chinese banking licenses sought by Taiwanese financial institutions. If ventures in China are risky, those that depend on a Taiwanese company are particularly vulnerable.

There are challenges closer to home as well. Taiwan is severely overbanked (see box, page 106). Fubon Bank’s net interest margins, like those of its major rivals, have contracted to about 3 percent in recent years (the U.S. average is just above 4 percent). There simply aren’t enough opportunities in the domestic market to support 52 banking companies trying to serve a population of 23 million. Most analysts think only ten to 15 banks will survive. Until the field narrows considerably, margins will remain under pressure, and expensive jockeying for market share will continue.

Fubon has experienced unproductive strategic alliances with foreign firms in the past. In the 1970s U.S. insurer American International Group bought a 5 percent stake in Fubon Insurance Co., also known as Fubon Property & Casualty Co. -- it still owns a bit less than 2 percent of Fubon Financial -- with an agreement to work jointly on insurance sales in Taiwan and Asia. Though they still cooperate on some reinsurance products, the two companies’ venture is largely dormant. “We are sorry the strategic alliance with Fubon P&C didn’t work out,” says Daniel. “In fact, we were talking about expanding our alliance beyond general insurance. But we didn’t have a conclusion at that time.”

Will the Citigroup-Fubon alliance also fade away? Or will Fubon become Taiwan’s preeminent financial services company with a fast-growing regional business? Given the Weill-Tsai personal chemistry and the substantial opportunities to cross-sell products in Taiwan, their alliance appears to have a good chance to succeed. The regional agenda, however, will be much harder to achieve.

THAT THE TSAI FAMILY IS AMONG the leaders of a new economic era of Taiwanese deregulation and growing regional ambitions is hardly a surprise. Through the Japanese occupation of the 1940s, the occasionally repressive regime of Chiang Kai-shek and Taiwan’s more recent democratic governments, the pragmatic, focused Tsais have found ways to prosper. They’ve provided funding for many of Taiwan’s most ambitious infrastructure projects. Most recently, Fubon has held a significant stake in the planned $15 billion high-speed rail system that will provide bullet train service from Taipei to the southern port city of Kaohsiung by 2005. The conglomerate is also a big financier of Taiwan Cellular Corp., the island’s No. 1 mobile phone company.

Fubon patriarch Wan-tsai hails from the rural township of Chunan, just north of the city of Taichung in central Taiwan. Farmers and small landowners, Tsai and his four brothers scraped together the resources to start a vinegar and soy sauce manufacturing business during the Japanese occupation. The business thrived, and by the 1950s, with Chiang Kai-shek’s Kuomintang in power, they diversified into trading rubber with Japan. A decade later (by then one brother had died and another had retired), they formed Cathay Group, which launched the family into both financial services and manufacturing.

In the 1980s their business nearly unraveled. One of Wan-tsai’s brothers, Tsai Wan-chun, ran into extreme difficulty when his son was caught in a financial scandal because he’d overlent to one of Cathay’s struggling manufacturing businesses. The bad loans brought down one of their holdings, Cathay Trust, then Taiwan’s largest private bank.

To prevent the scandal from spreading to Cathay Life Insurance Co. and Cathay Insurance Co., Wan-tsai and his brother Wan-lin decided to split up the group. Wan-lin took control of Cathay Life, today Taiwan’s largest life insurer, while Wan-tsai kept control of Cathay Insurance, Taiwan’s largest property and casualty insurer. He renamed it Fubon Insurance Co. (Fubon means “rich union”) in 1989.

Generally considered the bolder of the two, Wan-lin, now 78, aggressively pushed Cathay Life into large property holdings that have given him a net worth Forbes magazine estimates at about $4 billion. Cathay, today known as Cathay Financial Holdings, is Fubon’s fiercest rival for dominance of Taiwan’s financial services market. With a market cap of $11 billion and $62 billion in assets, it’s far larger than Fubon. The competition between the two is intense. Just four days after Fubon announced its TaipeiBank acquisition, Wan-lin struck back with his own blockbuster deal -- the $3.5 billion purchase of United World Chinese Commercial Bank. In addition to having the largest life insurance business, Cathay now boasts the tenth-biggest bank in Taiwan.

Meanwhile, Wan-tsai diversified more cautiously into slower growth businesses like securities and banking. Wan-tsai’s risk-averse nature played a key role in Fubon’s diversification; he didn’t want to be overly exposed to any one business line. “My father is famous in Taiwan for his conservative business practices, and this is why he built Fubon into such a diversified group,” says Daniel. “When he comes across a stone bridge, he always uses a walking cane to tap it first to make sure that it is safe before he crosses.”

RICHARD AND DANIEL TSAI HAVE HAD ALL THE advantages that come from a privileged upbringing. Richard graduated with an MBA from New York University in 1981 and wears expensive, tailor-made suits imported from Europe and Hong Kong. Daniel, who got a law degree from Georgetown University in 1979, can be found occasionally out enjoying Taipei’s upscale karaoke clubs. Both apprenticed briefly in New York -- Daniel at Tokio Marine & Fire Insurance Co. and Richard at Bankers Trust Corp. -- before returning to Taiwan to help their father in building up Fubon. Extremely close, the brothers work in different Fubon buildings in downtown Taipei but talk by phone or face-to-face at least six times a day.

Their father still serves as Fubon Group chairman and reports each day to an office on the 11th floor of the Fubon Property & Casualty Building.

Though Wan-tsai’s family is estimated to be worth more than $5 billion (it also has extensive real estate investments and a host of other assets), the three Tsais reside in apartments on the 14th and 15th floors of the rusty brown P&C Building, where Wan-tsai works. “Dad doesn’t like to be stuck in traffic,” says Daniel. “He likes to live where he works -- it takes him exactly two minutes to walk downstairs to his office.”

Imbued with a strong work ethic, the Tsais rarely show any signs of extravagance. The few exceptions: They maintain a small fleet of black Mercedes, and each Tsai has an entourage of bodyguards. Other than Daniel’s widely covered wedding -- he married a well-known local TV anchorwoman, Irene Chen of Taiwan Television network, in the mid-1980s -- the family has steered clear of the media spotlight. Daniel and Irene have four children. Richard, meanwhile, married his college sweetheart, Maggie Ueng, and has two children.

“They are fabulously wealthy, but they have no glamour whatsoever,” says Ng, the exSalomon Smith Barney banker who helped the Tsais seal the Citigroup deal before joining them. “Come to think of it, they may seem a little boring.”

“The Tsais are highly reputed in Taiwan,” says Yu Chang-san, assistant managing editor of CommonWealth, the island’s largest business magazine. “Other tycoons are known for mistresses and concubines, but the Tsais -- they’re only known to be politically well connected and to be savvy business people. There’s very little dirt on them.”

What they are known for is “their close ties to politicians over the years,” says Yu. Wan-tsai and his brothers were said to have cultivated relationships with KMT legislators in the decades following Chiang Kai-shek’s arrival on the island in 1949. More recently, they have been supporters of President Chen and his Democratic Progressive Party. They have spent lavishly on election campaigns and claim an unparalleled network of political contacts. These have served them well. The Tsais were the first private players to receive a license to sell insurance during the 1960s and have repeatedly won important franchises or land deals that required government approval. The passage of the Financial Company Holdings Act was partially the result of the Tsais’ lobbying, and the recent purchase of TaipeiBank -- over four other bidders -- needed the agreement of the municipal government of Taipei. These kinds of deals have caused rivals to grumble privately that the family has too much political influence.

NOTWITHSTANDING POTENTIAL GROWTH throughout Asia, Taiwan is clearly the priority right now. That’s where virtually all of Fubon’s business is done and where the opportunities to cross-sell products are greatest. “We have to dominate our home market first before we can go abroad,” says Ng.

So far they’re doing just fine. Last year, despite Taiwan’s first economic decline in four decades, Fubon Financial Holdings generated $3 billion in revenues and $254 million in profit, substantial gains from 2000’s $2.5 billion in revenues and $161 mil- lion in profits. In the first half of 2002, Fubon profit surged 43 percent, to $153 million, on revenues of $1.5 billion. Among its various operating groups, life insurance kicks in 39 percent of revenues, banking 26 percent, property and casualty insurance 20 percent and brokerage 15 percent (in accordance with the new Taiwanese law governing financial holding companies, the asset management business will only gradually be rolled into the holding company structure and isn’t included in Fubon results). It is easily Taiwan’s most diversified financial institution. Twelve other firms have followed Fubon’s lead to create a financial holding company, but none has anything approaching Fubon’s range and depth. Even with its bank acquisition, Cathay Financial remains heavily tilted toward life insurance. The insurance and brokerage units of Chinatrust Commercial Bank, until recently Taiwan’s largest private bank, are much smaller than Fubon’s. “While our rivals are only now trying to build or acquire diversified businesses, we can go straight to our 4.5 million clients and say, ‘Here, besides insurance, you can bank with us, use our credit cards, buy stocks from us and mutual funds from us,’” says Richard.

Adding heft, Fubon’s partner is a force in its own right. Citibank Taiwan’s roughly $19 billion in deposits represents 50 percent of the total held by all foreign banks in Taiwan. Its biggest strength: a blue-chip corporate clientele, which includes computer maker Acer, Formosa Plastics Corp. and Taiwan Semiconductor Manufacturing Co., as well as a large roster of foreign multinationals like IBM Corp. and PepsiCo that operate in Taiwan. It also runs a very successful credit card business, with 1.7 million customers, that is the third largest on the island. Last year Citibank Taiwan made an after-tax profit of $210 million, the sixth largest of any bank in Taiwan.

Together Citibank and Fubon make an imposing competitor. They have Taiwan’s largest sales force for banking and insurance products. Fubon operates out of 400 branches and sales offices and has a total of 10,000 employees, 8,000 of them insurance agents. Citibank, in turn, has ten branches and 2,600 employees.

Already the two have been very active in coordinating their activities. Citibank has put two operations -- its $23 million-in-assets Taiwan insurance and $14 million-in-assets money management groups -- into Fubon Financial. Through the bank and its Salomon Smith Barney brokerage affiliates, Citi is now selling Fubon insurance. Together Citi and Fubon are developing investment-linked insurance products. And Salomon is working to offer global and international funds that all Fubon clients can access.

One of the biggest shifts is a revamped customer relations management system and the merging of five major customer databases from Fubon Bank, Fubon Insurance Co., Fubon Investment Trust Co., Fubon Life Assurance Co. and Fubon Securities Co. The ultimate goal is to cross-sell products to Fubon’s 4.5 million customers and Citibank Taiwan’s 1.7 million clients.

For Citibank Taiwan the alliance does more than just give it additional access to customers via Fubon’s large branch network. “We no longer need to manufacture some products for Taiwan,” says Eric Chen, head of Citibank Taiwan. “When it comes to insurance or other products that we currently don’t have, we no longer need to create a company to produce them. We can sell Fubon insurance and need to only focus on our existing sales channels. We’ve got an alliance that can help us build more business as well as cut our costs.”

Richard believes these cross-marketing ventures are largely responsible for Fubon’s strong results last year. “There is some overlap in the banks, but the overlap isn’t that much,” he says. “We have different customers -- Citi focuses on large multinationals and large Taiwanese companies. We specialize in small and medium enterprises. But Citi clearly is helping us sell more products.”

Right now cross-selling various Fubon and Citibank products accounts for 5 percent of the conglomerate’s business. Richard hopes to push that number to 10 percent in the next 12 months. There is room for growth: Fubon customers on average buy 2.1 products each from the firm; in the U.S. Citigroup averages four to six products per client.

Fubon’s activity is helping to change the nature of finance on the island. The May 2000 linkup with Citi certainly helped to accelerate passage of the Financial Company Holdings Act. “Fubon-Citi is the first example of cross-shareholdings between a Taiwan financial company and a foreign company,” says Norman Yin, a legislator and finance professor at National Chengchi University. “Many are watching to see if it will be successful. If it is, more Taiwanese financial groups will look for foreign partners.”

Some already are. Jeffrey Koo Jr., president of Chinatrust Commercial, says he wants to do a variation on the deal Fubon did with Citi. “Our deal will be different,” says Koo. “Rather than sell shares in the holding company, we’ll form joint ventures at the subsidiary level.” Like many other local financial executives, Koo doesn’t want to risk losing control by selling off a substantial stake in the holding company.

Fubon is in a good position to move ahead quickly. Although much of the Asian financial crisis is behind them, Taiwan’s banks still have an average nonperforming loan ratio of 9 percent, very high by Western standards. The chief culprits: government-owned institutions, which make up about half of Taiwan’s bank population and have notoriously weak or nonexistent lending criteria. Banks like Fubon’s, with clean balance sheets and ample cash (Fubon has an estimated $1.2 billion available for purchases), are the likely acquirers of these inefficient and outmoded institutions. “Despite some past NPL problems at Fubon Bank, the group has among the cleanest balance sheets in Taiwan,” says legislator and professor Yin. “The key is implementation of their strategy.”

CAN FUBON AND CITI TEAM UP successfully throughout Asia? They have high hopes to use the Taiwanese company’s cultural and language connections to China to sell insurance there. Beyond that, they believe they can sell property and casualty and life insurance to the roughly 27 million ethnic Chinese who reside outside Taiwan and the mainland. Because the Fubon brand isn’t well known elsewhere in Asia and the company derives virtually none of its revenues from abroad, the insurance venture is akin to a start-up operation.

“Our joint venture looks at insurance markets in Korea, Hong Kong, China, Singapore, Thailand, Malaysia, Philippines and Indonesia,” says Richard. “Ten years from now we’ll have a presence in all of these countries, with significant market shares in their insurance markets. China, of course, will be our focus.”

The weakness in all the world’s markets in the past year or so has made Fubon executives uneasy about underwriting new business abroad. “Even if we get a lot of premiums, we can hardly get the returns that we need from the stock markets,” Daniel admits. “But that doesn’t mean our plans are canceled.”

An even greater risk stems from the volatile relationship between Beijing and Taipei. Though China has begun to liberalize its insurance markets because of its entry into the World Trade Organization and will issue licenses to foreign insurance operators for all cities by 2006, Taiwanese companies may be an exception. Beijing recently told eight Taiwanese banks applying for representative offices there that these licenses would be issued only if Taipei recognized that it is part of “one China.” President Chen responded that there are “two states” of China -- one on the mainland and one on the island. Though Beijing later retracted the demand, it highlighted the political risks. Despite close links, China and Taiwan still do not have official government-to-government ties or communications.

But the Tsais remain confident about their prospects in China. “I don’t believe [the political risk] will be too serious,” says Richard. “Taiwan and China’s relationship can only improve. The economic integration has begun. Both sides are working in earnest to solve the political gap.” However, he admits that Fubon can’t control political events. “It is possible [that we may not get a license],” he says. “I can’t rule it out. I have to admit that. Politics is always unpredictable.”

Still, the partners are plugging away. They just opened a 50-50 insurance joint venture in Hong Kong, a telemarketing company that will try to crack into the city’s lucrative life insurance market. The firm, Citi-Fubon Insurance Co., will try to sell insurance to Citibank clients in Hong Kong. Also in the planning stages are 50-50 joint ventures slated for countries across Asia.

Some analysts don’t believe the two have chosen the right product as a base for expansion. “Fubon is a great franchise within Taiwan, precisely because they proliferated their relationships using insurance as the basic product,” says Emmanuel Daniel, who runs Asian Banker, a Singapore-based business intelligence company for regional financial institutions. “For Fubon to grow outside of Taiwan, it must be done using a very basic product proposition. The problem with regionalizing using insurance as the basic proposition is that insurance in many markets has become a large-capital -- and very low-return -- proposition. Between banking, insurance and securities, my assessment is that securities is the best vehicle of the three to build a regional franchise, provided the markets are much more active than they are right now.”

Even Daniel Tsai doesn’t want to be held to a hard-and-fast time schedule. “Prioritywise, China comes first, but trying to get going operationwise isn’t that easy,” says Daniel. “We don’t have a definite timetable of when and how for these other markets. What we’re doing now is we go in separately but will plan to jointly explore the markets in the months and years ahead.” Depending on the market, CitiFubon Insurance Co. will either acquire or start companies from scratch. As in Hong Kong, Citi-Fubon will rely on Citibank clients to get started.

Citibank’s Long seems to accept that this is a long-term project. “We don’t make short-term investments,” he says. “The investment we made with the Fubon Group is going to be there for many years. Maybe we haven’t been able to do things [regionally] as quickly we would like from a Citigroup standpoint, and perhaps from a Fubon standpoint, but it’s because of the market conditions in Asia.”


Kicking off Taiwan’s banking consolidation

From soy sauce to securities brokerage, the Tsai family has had a golden touch in building and running businesses. One notable exception: banking. In the aftermath of the Asian financial crisis, the problems at Fubon Commercial Bank grew so severe that they opened a rare rift within the tight-knit family.

In 1998 Fubon Bank’s nonperforming loan ratio hit nearly 16 percent, measured by international standards, and it looked like the Tsai family might have to sell or restructure the bank. The Tsais reacted with characteristic speed. Fubon Group vice chairmen Richard and Daniel Tsai hired Yu Chen, the former top regulator at Taiwan’s Central Bank of China, to take control of Fubon Bank. An exacting manager, Yu almost immediately cut NPLs by half through an aggressive program of write-offs and asset disposal. He further took back the loan-making process from local branches and centralized it at headquarters; he then instituted a credit risk management committee. Problem loans have since declined to a manageable 3.8 percent, measured by international standards.

Still, the episode didn’t sit well with 74-year-old Fubon chairman Tsai Wan-tsai. His sons had taken over daily operation of the conglomerate and already had just barely averted a calamity. “Our father was very disappointed in us then,” recalls Daniel. “He felt we were too young. In a way, Richard and I were only focused on growth of Fubon Bank at the time and we weren’t careful enough.”

As a result, Daniel and Richard began a new family ritual; every Monday they meet their father for a three-hour lunch in the 11th-floor executive lounge of the Fubon Property & Casualty Building. “We bring him up to speed on what’s going on in the group,” says Daniel.

The sons also paid closer heed to one of their father’s key operating principles: diversification. “We aggressively expanded into consumer banking, whether finance, mutual funds or credit cards,” says Richard. “Consumer banking risks are far more diversified than corporate banking, and [consumer banking] has far more growth opportunities.”

Although it’s in better shape than it was two or three years ago, Fubon Bank remains the conglomerate’s main area of weakness, says Connie Wong, an analyst at Standard & Poor’s in Hong Kong. “It’s a relatively new bank [founded in 1992], and there’s lots of competition,” says Wong. S&P rates Fubon Financial Holding Co. a BBB on its long-term commercial paper and gives an A+ rating to Fubon Insurance Co. Even with its recent acquisition of TaipeiBank, S&P doesn’t intend to lift its BBB rating on Fubon Bank.

Nonetheless, the acquisition of much larger TaipeiBank, which had been controlled by the city of Taipei, for $2.3 billion in early August will help. (As a result of the purchase, the city becomes Fubon Financial’s second-largest shareholder, ahead of Citigroup). With 83 branches, more than double Fubon Bank’s 39, TaipeiBank will make Fubon Taiwan’s sixth-largest bank and gives it nearly a commanding 13 percent market share in the country’s biggest city. It adds $17.5 billion in assets to Fubon’s relatively meager $8 billion and a similarly low NPL ratio. The combined entity will have a 4.5 percent market share nationwide, more than three times that of Fubon Bank previously.

Even bulked up Fubon Bank still trails the island’s leader, government-run Bank of Taiwan, with $68 billion in assets and a 10 percent share.

Analysts view the acquisition positively. Sophia Cheng, a banking analyst at Merrill Lynch & Co. in Taiwan, upped her recommendation on Fubon Financial Holdings to a “strong buy.” “This early move places Fubon Financial Holdings at the forefront of industry consolidation and forces its peers to speed up their M&A activities,” says Cheng in a recent report.

With TaipeiBank in the fold, Fubon Bank should make a small but positive contribution to Fubon Group earnings this year, says S&P’s Wong. Previously, she had anticipated little, if any, earnings from the bank.

The TaipeiBank purchase appears to be the opening salvo in a long battle for dominance in Taiwan’s fast-changing banking market. Just days after Fubon acquired TaipeiBank, rival Cathay Financial Holdings, controlled by Wan-tsai’s brother Tsai Wan-lin, bought Taiwan’s tenth-biggest bank, United World Chinese Commercial Bank, a company with $20 billion in assets that Fubon had also eyed. That deal, valued at $3.5 billion, will give insurance-heavy Cathay a much stronger banking arm.

The race has only just begun. Analysts expect just ten to 15 of Taiwan’s banks to survive and only seven or eight to dominate locally. Roughly half of the 52 existing banks are government owned and generally carry the industry’s worst NPL ratios and lowest margins. This group is expected to virtually disappear.

The Tsais, who built their brokerage business from an also-ran to Taiwan’s second biggest by making six acquisitions in less than a year, have little doubt about Fubon Bank’s ultimate success in this race. “We’re going to win,” says Daniel. -- A.T.C

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