TAIWAN FINANCIAL SERVICES: TRENDS, OUTLOOK, … · TAIWAN FINANCIAL SERVICES: TRENDS, OUTLOOK, AND OPPORTUNITIES JUNE 23, 2005 1 ABOUT …

TAIWAN FINANCIAL SERVICES: TRENDS, OUTLOOK, AND OPPORTUNITIES JUNE 23, 2005

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TABLE OF CONTENTS

About the Organizers ................................................................................................................. 1 About the Eurasia Group .......................................................................................................1 About the US-Taiwan Business Council....................................................................................1 About the ROC-USA Business Council .....................................................................................1

Agenda....................................................................................................................................... 3

Sponsors .................................................................................................................................... 5 The Carlyle Group ................................................................................................................5 Citigroup.............................................................................................................................6

Speakers & Moderators .............................................................................................................. 7 Jaw-Sheng Kong ..................................................................................................................7 Simon C. Dzeng ...................................................................................................................7 Rupert Hammond-Chambers .................................................................................................8 C.Y. Huang..........................................................................................................................8 Jason Kindopp .....................................................................................................................9 Victor Kung .........................................................................................................................9 David N. Laux ....................................................................................................................10 Alex Lee............................................................................................................................10 Chung-Cheng Lin ...............................................................................................................11 Henry Lin ..........................................................................................................................11 Sherry Lin .........................................................................................................................11 David P. Sun......................................................................................................................11 Steve Wang.......................................................................................................................12

Keynote.................................................................................................................................... 13 Jaw-Sheng Kong ................................................................................................................13

A New Era of Financial Supervision in Taiwan...............................................................13 Introductions ........................................................................................................................... 19

Mu-Tsai Chen ....................................................................................................................19 C. Y. Wang ........................................................................................................................19

Presentations ........................................................................................................................... 21 Simon C. Dzeng .................................................................................................................21

The Implementation of Basel II in Taiwan....................................................................21 C.Y. Huang........................................................................................................................26

Paving Ways for Financial Consolidation in Taiwan........................................................26 Victor Kung .......................................................................................................................32

Corporate Governance in Taiwan................................................................................32 Alex Lee............................................................................................................................38

New Dynamic of Taiwan Equity Market........................................................................38 Chung-Cheng Lin ...............................................................................................................46

Trend & Opportunities of Financial Institutions Consolidation in Taiwan ...........................47 Henry Lin ..........................................................................................................................54

A New Phase of Fund Industry in Taiwan .....................................................................55 Sherry Lin .........................................................................................................................61

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Current Status, Trends and Outlook............................................................................61 David P. Sun......................................................................................................................67

Trends, Outlook, and Opportunities ............................................................................67 Steve Wang.......................................................................................................................70

The Latest Development of the Derivatives Market in Taiwan.........................................70





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ABOUT THE ORGANIZERS

About the Eurasia Group

Eurasia Group is a research and consulting firm that focuses on political-risk analysis and industry research for global markets. Eurasia Group has expertise on 65 countries in Asia, Latin America, Emerging Europe & Eurasia, and Middle East & Africa. We offer our clients analytical research publications and tailored consulting, as well as direct access to Eurasia Group analysts, on political trends and their impact on business, financial markets and the foreign investment climate. Eurasia Group also provides programming services that enable multinational companies to engage in direct dialogue with leaders from various emerging-market countries. The Deutsche Bank Eurasia Group Stability Index is the first qualitative comparative political and economic stability index designed specifically to measure stability in emerging markets. Developed over a five-year period by experts in transitional politics and economics, the methodology enables our in-country researchers to track new developments on a daily basis. The research provides an "early warning" system which helps anticipate critical trends and provides a measure for country capacity to withstand political, economic, security, and social shocks.

About the US-Taiwan Business Council

The US-Taiwan Business Council is a membership-based non-profit association, founded in 1976 to foster trade and business relations between the United States and Taiwan. The Council provides its members with access to an extensive network of relationships, and serves as an effective representative in dealing with business, trade, and investment matters. Council conferences, seminars, receptions, and other events held throughout the U.S. and Taiwan each year promote business relationships, provide a forum for sector-specific discussions, and offer access to a network of corporate leaders and government officials. The Council also produces a suite of industry-specific information products that provide members with the most up to date news, information, and analysis on events and developments that affect business in the U.S. - Taiwan - China dynamic.

About the ROC-USA Business Council

The ROC-USA Business Council, a non-profit civic organization, was founded in Taipei on February 26, 1977. Its main function is to enhance business relations between the Republic of China and the United States of America, including bilateral trade, investment and technical cooperation. The establishment of the Council was initiated by a group of prominent members of the ROC business community, who believed that an even stronger US-Taiwan economic relationship should be possible, if a well-organized effort could be made to create better understanding of each other’s potentials and capabilities, hence more opportunities for business cooperation. The Council’s membership is made up largely of top executives of both state and private enterprises, who have already had commercial relations with U.S. business firms. The membership covers quite a broad area of the manufacturing and service sectors, including information equipment, automotive products, electrical and electronic products, petrochemicals, banking and insurance, air and sea transportation, etc.





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AGENDA

8:30am - 8:45am

Welcome Remarks Rupert Hammond-Chambers, President, US-Taiwan Business Council

Representative, The Eurasia Group Mu-Tsai Chen, Chairman, Banking & Finance Committee, ROC-USA Business Council

C. Y. Wang, Chairman, ROC-USA Business Council

8:45am - 10:15am

Lecture/Q & A

Session I

Current Status, Trends, and Outlook for the Taiwan Financial Services Sector

Topics: A general discussion on the current status of the Taiwan market, impact of new financial reforms, the growth in cross-Strait financial ties, need for consolidation, incentives for M&A activity, reforms needed, the role of the Resolution Trust Corporation (RTC), systems needed for evaluating the market value of financial institutions, etc.

Moderator: Jason Kindopp, Asia Analyst, Eurasia Group Speakers: Simon C. Dzeng, Executive Vice President, Mega Holdings C.Y. Huang, Partner, Tsar & Tsai Law Chung-Cheng Lin, Financial Supervisory Commission Sherry Lin, Head of Research Taiwan, Credit Suisse First Boston David Sun, President, Cathay Security Company

10:15am - 10:30am Morning Break

10:30am - 12:00pm

Lecture/Q & A

Session II Taiwan Capital Market Development & Market Opportunities

Topics: Exploring opportunities in the Taiwan market. Introducing the

latest developments in the Equity, Bond, and Derivatives Markets.

Moderator: Jason Kindopp, Asia Analyst, Eurasia Group Speakers: Victor Kung, C.F.O., Fubon Holding Inc. Alex Lee, Managing Director, Deutsche Bank Securities Henry Lin, Chairman, Securities Investment Trust & Consulting

Association of R.O.C. Steve Wang, Chairman, Chinese National Futures Association

12:15pm - 2:00pm

Luncheon with Keynote Address A New Era of Financial Supervision in Taiwan

Introduction: David Laux, Chairman, Taiwan Greater China Fund Dr. Jeffrey Koo, Chairman, Chinatrust Financial Holding Speaker: Kong Jaw-sheng, Chairman, Financial Supervisory Commission











SPONSORS

Established in 1987, The Carlyle Group is a private global investment firm that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, and growth capital financings. The Carlyle Group is one of the world’s largest private equity firms, with more than $29.6 billion under management. With 31 funds across four investment disciplines (buyouts, venture capital, real estate and leveraged finance), Carlyle combines global vision with local insight, relying on a top-flight team of nearly 300 investment professionals operating out of offices in 14 countries to uncover superior opportunities in North America, Europe and Asia. While open to opportunities wherever they can be found, Carlyle focuses on sectors in which it has demonstrated expertise: aerospace & defense, automotive & transportation, consumer & retail, energy & power, healthcare, industrial, real estate, technology & business services, and telecommunications & media. In a world awash with information, insight is often in short supply. Carlyle’s edge is its ability to leverage the local insight of its investment professionals, collaborating across the firms’ investment disciplines from deal sourcing and due diligence through portfolio company development. The result: A broader view of potential investment opportunities and deeper level of expertise, creating value for Carlyle portfolio companies that translates into superior returns for Carlyle investors. Carlyle’s team of investment professionals includes 131 M.B.A.s, 27 J.D.s and 15 P.h.D./M.D.s from many of the world’s most prestigious universities. Carlyle’s conservative investment philosophy and disciplined investment process has generated extraordinary returns for its investors. Since its founding in 1987, the firm has invested $13.4 billion in 396 transactions. More than 800 investors from 55 countries entrust Carlyle with their capital and their reputations. As one means of aligning its own interests with those of its Limited Partner investors, Carlyle has committed more than $1 billion of its own capital to its funds.






Citigroup Inc. is today’s pre-eminent financial services company, with some 200 million customer accounts in more than 100 countries. Our history dates back to the founding of Citibank in 1812, Travelers Life and Annuity in 1864, Bank Handlowy in 1870, Smith Barney in 1873, Banamex in 1884, and Salomon Brothers in 1910. Other major brand names under Citigroup's trademark red umbrella include Citi Cards, CitiFinancial, CitiMortgage, CitiInsurance, Primerica, Diners Club, Citigroup Asset Management, The Citigroup Private Bank, and CitiCapital. Citigroup has had a presence in Taiwan since 1965, and we now have ten branches on the island. Our client base includes 1.85 million credit card holders, more than 200,000 retail bank customers and 3,100 corporate clients. Citibank Taiwan offers services including corporate banking, investment banking, credit cards, investment consulting, branch banking, securities, and insurance agency service. Citigroup's global corporate and investment bank offers financial services in investment banking, equity trading and international private client services. Our 2,500 employees proudly serve our local communities and valued customers every day.






SPEAKERS & MODERATORS

Jaw-Sheng Kong

Chairman Financial Supervisory Commission

Appointed by President Chen Shui-bian, Jaw-sheng Kong is the first Chairman of the Financial Supervisory Commission (FSC); a single financial regulatory authority established by the Government in July 2004 as part of a major initiative to promote Taiwan as a regional financial service center. As a ministerial authority under the ROC Executive Yuan, the FSC exercises a broad mandate in the supervision of Taiwan’s banking, insurance, securities and futures sectors. In addition, the FSC possesses quasi-judicial power to regulate the financial market. Prior to joining the FSC, Chairman Kong has held a number of significant positions in the private sector. He has served as Chairman of the Taiwan Sugar Corporation and on the board of the Taiwan Stock Exchange Corporation. He was also the Managing Director of Credit Suisse First Boston, Donaldson, Lufkin & Jenrette and Lehman Brothers. Prior to joining Lehman Brothers, Chairman Kong was a senior executive at the Union Bank of Switzerland and the Chase Manhattan Bank in Taiwan. He has worked on numerous international capital market transactions for major Taiwanese corporations. In his current official capacity, Chairman Kong has been leveraging his mix of banking and industry experience to restructure the supervisory framework and to foster a service-driven regulatory culture within the FSC. These goals are considered as top priorities in order to increase the efficiency and competitiveness of Taiwan's financial markets. Chairman Kong received his BA from National Chiao-Tung University in 1978 and MBA from Indiana University in the United States in 1980. He was elected chairman of the NCTU student body in 1976 and received the National Outstanding College Youth Award in 1977.

Simon C. Dzeng

Executive Vice President Mega Financial Holding Company

Present Executive Vice President, Mega Financial Holding Company Board Director, Mega Investment Trust Corporation Supervisor, Mega Asset Management Company Board Director, Jin Wen Institute of Technology Board Director, Institute of Management Accountants, Taipei, Taiwan Chapter

Professional ExperienceCorp Board Director and Executive Vice President /Spokesperson, China United Trust & Investment Chairman, Accurmind Consulting, Inc. Board Director, Asia United Bank, Philippines Principal & President, Deloitte & Touche CPAs, Deloitte & Touche Management Consulting, Inc. (Taiwan) Vice Representative and Chief Economist, Daiwa Securities Group, Inc. (Taiwan) Financial Advisor, BOT Legislation Taskforce, Legislative Yuan






Adjunct Associate Professor, Graduate School of Finance, National Taiwan University Chief Financial Advisor, Bureau of High Speed Rail Associate Professor in Accounting, Pace University Assistant Professor in Accounting, CUNY-Baruch College

EducationPhD (Accounting), Drexel University MBA (Finance), Drexel University Bachelor of Arts (International Trade), National Taiwan University

Professional LicensesCRP(Certified Risk Professional of BAI) CMA(Certified Management Accountant of IMA ) CPA (Certified Public Accountant of AICPA)

Rupert Hammond-Chambers

President US-Taiwan Business Council

Mr. Hammond-Chambers was born and raised in Scotland before emigrating to the United States in 1987, and earning a Bachelor of Arts degree at Denison University. As a new graduate in 1991, he worked for Advanced Telecommunication Corporation (ATC) managing a variety of clients with business interests in the Caribbean and Latin America. In April 1993, he joined The Center for Security Policy, a defense and foreign policy think tank in Washington, D.C., as the Associate for Development. The Center accomplishes its goals by stimulating and informing national and international policy debates, particularly those involving regional, defense, economic, financial, and technology developments that bear upon the security of the United States. Mr. Hammond-Chambers began working for the US-Taiwan Business Council in October 1994. In March of 1998, he was promoted to Vice President of the Council with additional responsibilities for office management, oversight of the staff, financial bookkeeping and a clear mandate to build out the Council’s member/client base. Mr. Hammond-Chambers was elected President of the Council in November 2000. As the trade relationship between the United States, Taiwan and China continues to evolve, he has worked to develop the Council’s role as a strategic partner to its members, with the continuing goal of positioning the Council as a leader in empowering American companies in Asia through value and excellence. Mr. Hammond-Chambers sits on the Advisory Boards of Redwood Partners International, The Sabatier Group and the Pacific Star Fund, is a Trustee of Fettes College and is a member of both the National Committee on United States-China Relations and the Council on Foreign Relations. He is married with two daughters.

C.Y. Huang

Representative Partner Tsar & Tsai Law Firm






C. Y. Huang is an international business lawyer licensed in both New York (1977) and Taiwan (1980), who specializes in the corporate and financial service practice. Is the Representative Partner for Tsar & Tsai, and acts as Counsel to the Insurance Committee of the American Chamber of Commerce in Taiwan.

ExperienceProfessor of Law, National Chung Hsing University, 1977 1986. Formerly associated with Hale and Dorr, Boston, Massachusetts, U.S.A., 1974 1975. Joined Tsar & Tsai in 1981 and is currently its Representative Partner.

EducationNational Taiwan University School of Law (LL.B., 1970; LL.M., 1973) University of Michigan Law School (M.C.L., 1974) Harvard Law School (S.J.D., 1976)

Author"Multinationals in the Republic of China - Laws and Policies", "International Commercial Law", "Taiwan Insurance Law", "Product Liability Law in Taiwan".

Jason Kindopp

Analyst Eurasia Group Jason Kindopp is the China analyst at Eurasia Group and a member of the Asia Practice. Jason received a PhD in political science and a master's degree in international affairs from George Washington University. He also holds a graduate certificate in Chinese Studies from Johns Hopkins University and a bachelor's degree from Pacific Union College. Prior to joining the Eurasia Group, Jason was a resident scholar at the National Committee on United States-China Relations. He has also been a visiting scholar at the Sigur Center for Asian Studies and the Brookings Institution, and has taught and studied at Chinese universities in Nanjing and Hefei. Jason has lived and researched extensively in mainland China, Hong Kong, and Taiwan. A specialist in state-society relations and political stability in China, Jason's doctoral work focused on threats to social stability in China. He has also edited a major volume examining the political implications of the religious resurgence in China. He is a contributor to Brookings' Northeast Asia Survey, and has been published in a variety of media, including Current History, Newsday, and the Washington Journal of Contemporary China.

Victor Kung

Senior Executive VP/CFO Fubon Financial Holding Company

Mr. Victor Kung is Senior Executive Vice President and Chief Financial Officer of Fubon Financial Holding Company. Mr. Kung is also a member of Fubon Financial’s management committee. His responsibilities, in addition to financial management, include strategic planning, corporate governance, government relationship, and investor relations. Prior to joining Fubon in 2000, Mr. Victor Kung worked as Executive VP at Walden International Investment Group, a US$2 billion private equity investment group, and was responsible Walden’s investments in China and Hong Kong. Mr. Kung also worked at Citicorp and AIG, mainly responsible for






their private equity investments in Asia Pacific. Mr. Kung began his career with Irving Trust Company (now Bank of New York) as an international economist. Mr. Kung is a graduate from National Chung Hsing University in Taiwan, majoring in Economics. He later earned two master degrees from New York University, one in Economics and another in Finance.

David N. Laux

Chairman Taiwan Greater China Fund

Mr. David Laux has been the Chairman of the Taiwan Greater China Fund since July 2004, Mr. Laux was President of the US-Taiwan Business Council from 1990 to April 1, 2000, and from December 1986 until joining the US-Taiwan Business Council in 1990, Mr. Laux served as Chairman and Managing Director of the American Institute in Taiwan (AIT). AIT is a non-profit corporation, incorporated under the laws of Washington, D.C., which is under contract to the Department of State to manage the unofficial, commercial, cultural and other relations between the people of the United States and the people of Taiwan. Prior to joining AIT, Mr. Laux was with the National Security Council (NSC) in the White House, where he was the Director of Asian Affairs from August 1982 until December 1986. At the NSC, Mr. Laux had responsibility for Chinese Affairs (Peoples Republic of China, Taiwan, Hong Kong, Mongolia and Macao), as well as Australia, New Zealand, the Pacific Island Nations and the Trust Territory of the Pacific Islands (Micronesia). Mr. Laux was responsible for planning the President’s personal involvement in U.S. relations with these countries, including the President’s trips abroad, planning and preparation for State visits to the U.S. by foreign leaders, and reviewing and commenting on proposed policy options. Mr. Laux accompanied the President and the Vice President on their trips to China, and was a member to numerous other delegations to Asian countries. Prior experience includes an appointment with the Department of Commerce, where he was the Director of the Office of China and Hong Kong Affairs. He has also served with the Department of the Treasury and other U.S. agencies, and has had experience in publishing and investment banking in the private sector. Mr. Laux obtained his B.A. from Amherst College and his M.B.A. from The American University, and has done graduate work in government and Chinese studies at the University of California (Berkeley) and Georgetown University. He is also a graduate of the Advanced Management Program at Harvard Business School. Mr. Laux is Vice President of the Foreign Policy Discussion Group in Washington, D.C. He has been a lecturer at George Washington University and a number of U.S. government institutions on U.S. foreign policy in Asia, the national security process, and developments in China and Taiwan. Mr. Laux speaks Chinese, Japanese and French. He has served in the U.S. Army and the U.S. Marine Corps. He and his wife, Elna, have eight children.

Alex Lee

Managing Director & Head of Taiwan Equity Deutsche Bank, Taipei Branch






Alex has been head of Taiwan Equity since July 2003. Prior to joining Deutsche Bank, Alex was an MD and Head of Taiwan Operations at CSFB and BZW. He holds a MBA degree from George Washington University, Washington D.C. Alex is also the Founder and Chairman of the Taiwan Foreign Broker Committee, one of the self-regulatory bodies in the Taiwan securities industry.

Chung-Cheng Lin

Commissioner Financial Supervisory Commission Dr. Chung-Cheng Lin was nominated by the Premier and appointed with the consent of the President as the commissioner of the FSC in March 2005. Prior to his appointment, he was the at-large member (DPP) of the Legislative Yuan since 1996 and the Advisor of Mainland Affairs Council. Earlier, he was the chairman and professor of the department of economics, National Central University and he also served as a research fellow in Academia Sinica. He earned his Ph.D. in economics from University of Hawaii, U.S.A. His research interests include industrial economics, labor economics as well as Taiwan financial regulation & development.

Henry Lin

Chairman Securities Investment Trust & Consulting Association of the R.O.C.

PresentCEO of Uni-President Assets Management Corp. Chairman of Securities Investment Trust & Consulting Association of The R.O.C. Supervisor of Taiwan Financial Services Roundtable, TFSR

Professional ExperienceCEO of President Futures Corp. AVP of Information Technology Dept., President Securities Corp. Manager of Information Technology Dept., Siemens Telecommunication Systems Limited

Sherry Lin

Director, Head of Taiwan Research Credit Suisse First Boston

Sherry Lin is Head of Taiwan Research for Credit Suisse First Boston. She is also part of the Asia financial research team and covers financial institutions in greater China. Sherry has twelve years of experiences in financial sector research and commercial banking and has specialized in north Asian markets. Sherry and her research team are consistently ranked in external polls including Institutional Investors, Asia Money, and Greenwich surveys. She holds an MBA from William E. Simon School at University of Rochester, US. Sherry is based in Taiwan.

David P. Sun

President, Cathay Securities Corporation Senior Vice President, Cathay Financial Holdings






Mr. David Sun joined Cathay Financial Holdings in September 2003 as a Senior Vice President in the Corporate Planning Division. He was subsequently appointed as the President of Cathay Securities Corporation, a newly-formed and wholly-owned subsidiary of Cathay Financial Holdings, in August 2004. From 1994 to 2003, Mr. Sun worked in the Investment Banking Division of Morgan Stanley based in New York where he was involved in the execution of a broad range of public and private financing and M&A transactions. Mr. Sun received an MBA from Harvard Business School and an AB from Harvard College.

Steve Wang

Chairman Chinese National Futures Association Steve Wang is President of Fuh-Hwa Futures Corporation in Taipei, Taiwan from 2003 to present. Prior to his position with Fuh-Hwa, Mr. Wang was President of Grand Cathay Futures Corporation. From 1993 to 2003. Mr. Wang was the Director of Asian Development for the Chicago Mercantile Exchange in United States and he was also previously with Dean Witter in Chicago as Vice President of Dean Witter’s Institutional Futures and Options Division. Mr. Wang was one of the preparatory committee members of the Taiwan Futures Exchange, and also one of the committee members pointed by the Taiwan SFC to review the Taiwan futures law and regulations. Mr. Wang is the current chairman of the Chinese National Futures Association, and he was the chairman of former Taipei Futures Association as well. Mr. Wang is an overseas Chinese who was born and grew up in South Korea. He went to Taiwan for college in 1969, and accomplished an MBA degree at the Portland State University in the U.S.A.






KEYNOTE

Jaw-Sheng Kong

Chairman Financial Supervisory Commission

A New Era of Financial Supervision in Taiwan

1

A New Era of Financial Supervision in Taiwan

ByKong, Jaw-Sheng

Chairperson Financial Supervisory Commission

June 23, 2005

Finance Conference– New YorkHosted by US-Taiwan Business Council and ROC-USA Business Council

Outline

� Taiwan Financial Market Update� Banking

� Capital Market

� Insurance

� Newly Integrated Financial Regulator� Organizational structure

� Missions

� Ongoing tasks

� Rationale for promoting Taiwan as a regional financial services

center

� Conclusion






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Market update--Banking

� Aggregate banking asset� $456 bn (No. 3 in Asia, excluding Japan)

� NPL ratio has been lowered� From 8.09 % in March 2002 to 2.75% in April 2005

� Amendment to RTC Act passed on May 31� to resolve troubled financial institutions

� Challenge: need big and good banks� M&A in action

Source: CSFB Taiwan Research (2005), Banking Bureau, FSC (2004, 2005)

4

Market update--Capital Market� Sound stock market with high liquidity

� Market cap: $440 bn (No. 3 in Asia, excluding Japan), foreign investors account for 26.76%

� Trading value: $717 bn (No. 1 in Asia, excluding Japan), foreign investors account for 20%

� Gain global recognitions from US SEC, MSCI, FTSE, Asia Risk Magazine, etc.

� Growing fixed income market� Total bond outstanding: $155 bn, increased by 3 folds from

1998� Growth rate of the size of bond market: 22% yearly in the

past 5 years

Source: TSEC website (2005) & OTC (2005)






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Market update--Insurance

� Assets of insurance industry: $182 bn (No. 3, excluding Japan)

� Premium income growth rate: 17.25% during 2000-04, due to:

� Yield enhanced by new product development

� New labor pension scheme brings in opportunities for insurance

market

� A significant portion of pension will be managed by financial

institutions

� Potential growth of insurance market is $10bn per year including

annuity and asset management

Source: Insurance Bureau (2005), Taiwan Insurance Institute (2005)

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Commissioners

Banking Bureau

Insurance BureauDepartment of PlanningDepartment of International AffairsDepartment of Legal AffairsDepartment of Info Management Other supporting units

Securities & Futures Bureau

Financial Examination Bureau

Chairperson

Newly Integrated Financial RegulatorFSC Organizational StructureNewly Integrated Financial RegulatorNewly Integrated Financial RegulatorFSC Organizational StructureFSC Organizational Structure

Commissioner Meeting






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Newly Integrated Financial Regulator

Missions:

� Maintain Financial Stability

� Expedite Financial Industry Development

� Implement On-going Financial Reform

� Protect Investors and Consumers

8

Reshape supervisory culture

Speed up consolidation in financial market

Liberalize and internalize financial market

Promote Taiwan as a regional fund-raising and asset management center

FSC Goals






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Rationale for Promoting Taiwan as Regional Financial Services Center

� Strong and globalized manufacturing base � Huge capital surplus & low external debts� Well-trained talents & well-established

financial system � Geographic & cultural advantages in East Asia� Government’s firm commitment

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Conclusion

East Asia– a fast growing region and the global logistics, high-tech manufacturing center in the world

Taiwan-- geographic center of East Asia & gateway to Greater China region

FSC-- committed to fair, sound and profitable environment for financial services industry






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For more information:Tel: +886 2 8968-0899

Website: www.fscey.gov.tw






INTRODUCTIONS Remarks as Prepared For Delivery

Mu-Tsai Chen

Chairman, Banking & Finance Committee ROC-USA Business Council

Chairman Brock, Mr. Kindopp, Honorary Chairman Koo, Chairman Wang, Ambassador Hsia, dear colleagues, distinguished guests, ladies and gentlemen. It is with great pleasure that for the first time the Taiwan financial communities have been able to come here in New York City to update our American colleagues and friends with the current status and future development of Taiwan’s financial services. I am particularly happy that in my capacity as Chairman of the Banking and Finance Committee of the ROC-USA Business Council, I was able to organize a delegation with 39 prominent members for this conference in only 4 months after the formation of the committee, and my committee has thus at the same time built up a membership of more than 20, which is an outstanding accomplishment so far. On behalf of the committee, I thank you all delegates and speakers, and on your behalf, I wish to extend my hearty gratitude to the US-Taiwan Business Council, the ROC-USA Business Council, and the Eurasia Group for jointly initiating and organizing today’s conference. In the past decade, Taiwan has gone through steady change in its institutional financial reforms and is striving in its initiative to promote Taiwan as the Asian regional finance service center. I believe our U.S. colleagues just can’t afford to be absent in this emerging market and opportunities, and I am sure that your participation today is worthwhile. Ladies and gentlemen, thank you again for being with us today. Let’s wish the conference great success. Thank you.

C. Y. Wang

Chairman ROC-USA Business Council

Chairman Brock, Mr. Kindopp, Ambassador Hsia, Honorary Chairman Koo, Chairman Kong, Chairman Chen, distinguished guests, ladies and gentlemen. It gives me great pleasure to be here in New York City to co-host this conference on Taiwan Financial Services. On behalf of the ROC-USA Business Council and the delegation from Taiwan, I want to thank Chairman Brock and President Hammond-Chambers of the US-Taiwan Business Council, our U.S. counterpart, and Mr. Kindopp of Eurasia Group for their efforts and hard work in initiating and co-organizing the conference. This conference is the first both Councils have ever done together on tailor-made single sector topics and would be a model for future cooperation between our two councils. I am glad that our two councils, based






on the historical cooperative experience and contribution made jointly in the past 28 years in strengthening business ties between Taiwan and the United states, have been on consensus to focus on more practical single sector events like today’s conference. And there will be more when my Council is working hard toward establishing single industrial sector committees such as: High-tech Committee, Banking & Finance Committee, Biotech Committee, Information & Telecommunication Committee, and even Agricultural & Food Committee and many more committees as long as Council members have such a need. I am sure that the US-Taiwan Business Council, under the new leadership of Chairman Brock, will work hand in hand with my Council to attain the goals. I also want to thank Chairman Chen of the China Development Financial Holding Corporation for working closely with my Council in inviting a prominent group of speakers and delegation members, who have spared time from their busy work to fly a long way from Taiwan for this significant event. We are here not to sell made-in-Taiwan products but rather to brief our American friends on a very important sector in the service industry: the trends, outlook, and opportunities of Taiwan’s financial services and capital market. I sincerely hope that both sides can benefit through open discussion and exchange of views and experience. Thank you all, and have a nice day！






PRESENTATIONS Remarks as Prepared For Delivery

Simon C. Dzeng

Executive Vice President Mega Financial Holding Company

The Implementation of Basel II in Taiwan

1

The Implementation of Basel II in Taiwan

Dr. Simon C. DzengExecutive Vice PresidentMega Financial Holdings

Taiwan Financial Services:Trends, Outlook, and Opportunities

New York, New YorkJune 23,2005

Topics

• Taiwan’s response to Basel II and itsrationale

• Current Status• Related issues






3

Different Countries seem to have responded to Basel II differently…• China and India – Stay with Basel I• Hong Kong / Singapore – Up to the banks to select the

appropriate approach• EU – Expects all 15 member states to follow Basel II• UK – Up to the banks• US – The Big -10 ( forex≧US$10bil or TA≧US$250bil ) must

adopt the “advanced” approaches under Basel II ; The next 10 or so can volunteer to adopt these ; All the others will stay with Basel I.

But the theme stays the same – prudent and practical3

4

The US Approach is particularly worth noting…

Fed points out 5 reasons for the “non-core” banks to stay with Basel I:1. These banks’ relatively simple business cannot benefit much from the

sophisticated risk measurement and management methodologies of Basel II;

2. The great majority of these banks already enjoy CARs much above 8%, thanks to PCA and other regulatory and supervisory requirements;

3. The existing US regulations have Basel II’s 2nd and 3rd pillars largely covered ;

4. Cost benefit analysis indicates the capital spent on adopting Basel II will be far greater than the little additional risk sensitivity gained;

5. Major rating agencies already decided not to downgrade non-Basel II-compliant banks if they are not ready for it.

…the essence of being prudent and practical !4






5

Taiwan’s choice is very similar to HK’s and Singapore’s

• All banks (but not the financial holding companies) should adopt one of the approaches provided by Basel II before the Basel Committee’s deadlines ;

• Banks should select the appropriate approach on their own based on the complexity and risk profile of their businesses ;

• Banks are encouraged to continually upgrade their risk management practices and benchmark themselves against the best practices of international banks.

5

6

Using Size as a guide…

NT$ US$ NT$ US$1 Bank of Taiwan 162,880 5,254 2,484,118 80,133 2 China Development Indistrial Bank 127,318 4,107 199,034 6,420 3 Chinatrust Commerical Bank 95,998 3,097 1,333,995 43,032 4 Taipei Fubon Bank 86,235 2,782 1,059,134 34,166 5 Cathay United Bank 85,116 2,746 1,036,433 33,433 6 Land Bank 80,430 2,595 1,794,396 57,884 7 The International Commerical Bank of China 76,974 2,483 1,092,520 35,243 8 Chang Hwa Bank 75,502 2,436 1,275,500 41,145 9 First Bank 70,748 2,282 1,547,323 49,914 10 Hua Na Commerical Bank 67,331 2,172 1,557,151 50,231 11 Taishin International Bank 66,210 2,136 780,907 25,191 12 Taiwan Cooperative Bank 62,763 2,025 1,995,606 64,374 13 Chiao Tung Bank 61,811 1,994 615,941 19,869 14 The Shanghai Commerical & Savings Bank 47,019 1,517 420,139 13,553 15 Taiwan Business Bank 37,605 1,213 1,050,587 33,890 16 International Bank of Taipei 37,118 1,197 416,717 13,442 17 E. Sun Bank 34,139 1,101 443,986 14,322 18 Bank SinoPac 29,212 942 450,244 14,524 19 Industrial Bank of Taiwan 25,879 835 87,247 2,814 20 Union Bank of Taiwan 22,094 713 296,694 9,571

Rank Bank Name Equity Assets

Rank Bank Name / Holding Co Name Consolidated Assets1 JPMORGAN CHASE BK NA/JPMORGAN CHASE & CO 983,0492 BANK OF AMER NA/BANK OF AMER CORP 838,2583 CITIBANK NA/CITIGROUP 684,5924 WACHOVIA BK NA/WACHOVIA CORP 454,751

12 KEYBANK NA/KEYCORP 85,29713 BANK OF NY/BANK OF NY CO 80,11614 PNC BK NA/PNC FNCL SVC GROUP 75,52415 BRANCH BKG&TC/BB&T CORP 74,37516 LASALLE BK NA/ABN AMRO N AMER HC 67,724

US Banks Ranking

Taiwan Banks Ranking

Source:BOMA

Source:FED

In US$mil.

19 MBNA AMERICA BK NA/MBNA CORP 58,38120 FIFTH THIRD BK/FIFTH THIRD BC 57,19121 BANK OF AMER NA USA/BANK OF AMER CORP 54,34422 COMERICA BK/COMERICA 53,89023 MANUFACTURERS & TRADERS TC/M&T BK CORP 53,37724 CHARTER ONE BK NA/CITIZENS FNCL GROUP 53,04425 TREASURY BK NA/COUNTRYWIDE FC 51,10726 REGIONS BK/REGIONS FC 50,88627 AMSOUTH BK/AMSOUTH BC 50,15128 UNION BK OF CA NA/UNIONBANCAL CORP 48,81429 CITIBANK SD NA/CITIGROUP 47,98030 FIFTH THIRD BK/FIFTH THIRD BC 46,373

In milions

US$ : NT$ = 1 : 326






7

Certain Observations can be made…

• The largest Taiwanese bank (BoT) ranks about 13th in the US.• The third largest (CTB+ICBC, or “Mega Bank”) ranks about 20th.• The 20th in Taiwan 75th in US.

1. Only a handful “should ”adopt advanced Basel II.2. All the others can feel comfortable with “standarized” Basel II)3. Taiwan’s response to Basel II is consistent with the

international community.

～～

However, Taiwan needs to beef up the general CARsand adopt PCA-like regulations, along with better corp. governance and fin. disclosures.

7

8

Current status

Learning,Watching&Preparing

DoingSomethingIn-house

StartedBasel IIProjects

CanClaimReady

Credit Risk Std 10+ 7+ 0F-IRB 3 0A-IRB 3 0.8

Market Risk Std ? 5+ 5IMA 10+ 5+ 0.8*2

Op. RiskBIA 5 2Std 1 0AMA 0 0

the rest 5

10+the rest

the rest

Source: Mega RM Dept. unofficial survey 8






9

The government is helping (particularly the smaller ones) by:

• Forming study groups and publishing Basel II reports.• Engaging PWC to jointly write a “risk management best

practices manual” for all banks.• Giving JCIC mandate to establish FIRB and AIRB needed

credit databases.• Revising existing and devising new regulations to facilitate

Basel II and new risk management practices.

Current status ( cont. )

9

10

Related issues

• The second wave of financial reform.• Corp. governance in the wake of Enron and ProComm, i.e.,

SarbOx.• New accounting standards.• Basel III ?

Basel X is about risk culture/management, infrastructure, data, and long-term commitment! 10






C.Y. Huang

Representative Partner Tsar & Tsai Law Firm

Paving Ways for Financial Consolidation in Taiwan

The Need for Consolidation of Financial InstitutionsIn recent years, the financial industry has experienced evolutionary transformations. The most conspicuous global trend among those changes would be the “de-specialization” or, to put it in another way, the “service integration of the financial institutions.” As the corporate and consumer deposits have dropped significantly worldwide in the 1970s, financial institutions—especially traditional lenders—have felt strongly the market pressure of expanding product offerings. As a result, many financial institutions have found cross-industry consolidation appealing or even necessary for their survivals. By the mid-1990s, the process of convergence had transformed the financial services landscape. In many countries, constraints that have divided the financial marketplace have been lifted, and differences that once distinguished banks, insurance companies, and securities firms have been gradually obscured. Pure financial holding companies were first permitted to be established in Japan in 1997. In the United States, the Gramm-Leach-Bliley Act, also known as the Financial Modernization Act, was passed in 1999 in response to the creation of Citigroup—America’s largest financial conglomerate. Taiwan has also followed suit and enacted the Financial Holding Company Act in 2001. As complexity rose, smaller institutions found themselves at a competitive disadvantage. Great capital and large size are now viewed as representative of higher credibility of a financial institution. For example, in the United States, 90% of the financial holding companies with assets over 10 billion US dollars were ranked as the first tier, whereas only 35% of those companies with assets less than 1 billion were ranked as the first tier. Moreover, more and more studies have found that cross-industry consolidation of financial institutions is rather cost-effective. Some empirical studies even pointed out that the combination of banking and life insurance is the most cost-effective type of consolidation. The potential benefits of cross-industry consolidation of financial institutions can be summarized as follows. First, provision of diverse financial services effectively integrates the management resources of a financial institution and creates economies of scope as well as economies of scale. Considering that the nature of financial industry is information-processing, the rapid development of information technology helps consolidate the management resources and create greater economies of scope. Furthermore, diversification of financial products distributes and reduces the management risks of a financial institution, thereby undermining the impacts of the business cycle on the profit-making. Lastly, consolidation of financial services provides “one-stop shopping,” meeting the customer demand more efficiently and decreasing the transaction costs. All these potential benefits attract many financial institutions worldwide to strive to become “financial supermarkets” offering all things to all customers. With the passage of the Financial Holding Company Act (hereinafter the “Act”) in 2001 and the implementation of the financial holding company structure in the financial marketplace, financial modernization in Taiwan has taken a big step forward. After the Act went into effect, a total of 14 financial holding companies (hereinafter FHCs) were established, which house various financial institutions such as banks, insurance companies, securities firms, and asset managers. This phenomenon, albeit encouraging, is nonetheless less meaningful than it appears. According to a report by McKinsey & Company, only 4 banks actually exited from the market since 2001, and the total number of banks is still






too high compared with other countries.1 Apparently, after the legalization of FHCs, banks in Taiwan merely opted for legal and organizational reshuffling and regrouped under the new FHC “umbrellas,” whereas true mergers between banks have been largely absent. The Act alone, it seems, has failed to consolidate the banking industry. Observation that Taiwan is over-banked is supported by empirical evidences. McKinsey & Company found that currently there are some 50 banks in Taiwan, with the 5 largest ones together having only 38% of market share.2 Compared with other banking markets in the world, the financial market in Taiwan is extremely fragmented. Banking sectors in countries at a similar stage of economic development as Taiwan are typically twice as concentrated.3 And in many mature markets, there are typically no more than 2 or 3 broad-based banks with combined market shares of 60% - 90%.4

Financial consolidation in Taiwan is necessary for financial institutions not only to sustain a healthy financial environment domestically but also to increase competitiveness in the international world. Having an unhealthy banking sector disrupts the economic stability of a country. Take Japan’s burst bubble economy for an example. Unprofitable banks will continue to lend excessively to weaker sectors of the economy, resulting in higher NPLs, greater risk exposure, and economic stagnation. Moreover, creation of large and highly-skilled institutions in Asia so as to tap regional growth opportunities is critical for Taiwan in order to both keep high-skilled, well-paid jobs at home and actively participate in the future waves of regional consolidation. Lastly but not the least, if financial institutions in Taiwan would like to claim a share of the financial market in China—the Jerusalem of the capitalist world in this century, the sheer scale of the China market and the need to compete against both large and well-entrenched domestic banks, not to mention world-class foreign banks, will require investments of at least $500 million and upwards to obtain any meaningful influence. All these reasons demonstrate that the stakes for financial consolidation in Taiwan are indeed high. Recognizing the urgency of this issue, the Taiwan government announced in October 2004 the following action plans to effect financial consolidation:

1. Encouraging mergers and acquisitions in the financial sector so as to reduce the number of FHCs in Taiwan from 14 to 7 by the end of 2006

2. Developing at least 3 financial institutions with over 10% of the market share by the end of 2005 3. Reducing the number of government-owned banks from 12 to 6 by the end of 2005 4. Establishing at least one financial institution managed by foreign institutions or become listed in

overseas markets by the end of 2006. Although many critics have questioned how the number came out, the goal of financial consolidation, in view of the above discussion, is nonetheless reasonable. High-level target-setting has to be backed up with a comprehensive agenda detailing what needs to be done and how it will be done for the goal to be realized.

Overview of the Past Consolidation CasesBefore entering the discussion of what needs to be done in order to accelerate the pace of financial consolidation, a snapshot at the financial consolidation cases taking place these years may be helpful. Thus far, all of the successful financial consolidations involve domestic institutions:

1 See MCKINSEY & COMPANY, A BRANCH-BASED PERSPECTIVE ON BANK CONSOLIDATION IN TAIWAN 4 (2004). 2 See id. at 6. 3 See id. at 7. 4 See id. at 8.






1. ICBC & Mega Financial Holdings: Chiaotung Bank and Barits International Securities were merged in 2002, establishing Mega Financial Holdings as a result, which later acquired International Commercial Bank of China in that same year.

2. Cathay Bank & United World Chinese Commercial Bank: The merger of the Cathay Bank and United World Chinese Commercial Bank took place in 2003. Both banks were first acquired by the Cathay Financial Holding Company and became its wholly-owned subsidiaries in 2002 and then further merged as the Cathay United Bank.

3. Chinatrust Commercial Bank & Wan-Tung Commercial Bank: Chinatrust Commercial Bank became a subsidiary of Chinatrust Financial Holding Co. in 2002, and then acquired Wan-Tung Commercial Bank in 2003.

4. Fubong Bank & Taipei Bank: Taipei Bank was first acquired by Fubong Financial Holdings in 2002, and then merged with Fubong Bank this year.

Most recently, another merger was just announced in April between Shing-Kong Financial Holdings and Makoto Bank. In view of the above, FHCs have been the most important driving force of the financial consolidation, providing an important platform for mergers and acquisitions among different financial institutions. And that is why critics appear to have reservations about the government’s proposed goal of reducing the number of FHCs, considering it unrealistic and unreasonable approach to accomplish financial consolidation. On the other hand, foreign investors have not been actively participating in this wave of financial consolidation. The government has invested significant efforts to release its shares in the state-owned banks, hoping to invite foreign investment in the local banks. But the first signature case, Chang Hwa Bank’s private placement of GDRs ultimately failed because the price proposed by the foreign investor was considered too low by the legislature. Such lack of interests may be the result of foreign investors’ global distribution plan, which is guided by the potential profitability of the Taiwan market. Understandably, foreign investors may be uncertain about the gains and benefits of acquiring a local financial institution in Taiwan and have difficulty appreciating the value and worth of the local financial institution. Moreover, foreign investors often want to exert strong, if not full, control over the local institution. For example, foreign investors have opted for de-listing its invested institution from the stock exchange after investing in local institutions, so that the administrative costs of managing the local institution may be reduced. Such different understandings and management styles are embedded in the hunting and negotiation process. However, as financial consolidation is necessary and indeed vital to the health and integrity of the financial environment of Taiwan, examination of the current regulations is always the government’s homework if it takes the its responsibility seriously. The rest of this article shall pinpoint the measures that need to be taken for the goal of financial consolidation to be materialized.

Shaping a More Friendly and Efficient Legal Environment for Financial Consolidation

Acquisition and Hostile Takeover For the past twenty years or so, the biggest challenge facing the banks in Taiwan is lack of competitions. The government has invested lots of efforts in implementing policies conducive to deregulation, including permitting the establishment of privately-owned financial institutions, privatizing state-owned financial institutions, and designing incentives that would encourage foreign financial institutions to set up branches






and subsidiaries here. Now that the financial market is over-crowded, the crisis facing financial institutions now was just the opposite of the challenge twenty years ago. Healthy market competition has evolved into cut-throat competition, mainly resulting from too many financial institutions with overlapping target markets. The rapid emergence of many similar institutions back-fired, and institutions cannot but be trapped in price wars. Consequently, aside from direct impacts on profitability, the financial sector in Taiwan as a whole has suffered from detrimental side-effects of over-saturation. Aware of the growing risks arising from over-competition among financial institutions, the Law Governing the Merger of Financial Institutions was passed in 2000, followed by the passage of the Financial Holding Company Act about a year later. Although these two Acts have set tone for the government’s directive for encouraging the financial consolidation, in the eyes of “real players,” the expected fruit of consolidation does not come along just with the passage of the laws. The government’s reservation about hostile takeovers of financial institutions is also under criticism. Recently the Financial Supervisory Commission (the “FSC”) made a clarification that it remains neutral on the issue of financial consolidation, has no intent to restrict hostile takeovers provided that those actions are pursued in order to accomplish adequate economic scale or operational synergy effect. This assertion should be welcomed by the financial industry.

Reconsider the Public Tender Offer Requirement As stated above, mergers among financial institutions are less likely to take place than acquisitions in Taiwan. To facilitate acquisitions of financial institutions, examination of the current tender offer regulation is also needed. Pursuant to the Securities and Exchange Act and Guidelines Governing Public Offer of the Securities of Listed Companies, whoever contemplates on acquiring 20% of the total issued shares of a public company is required to make the acquisition through public tender offer. Violation of the requirement shall result in imprisonment for no more than 2 years. The purpose of such a restriction is to prevent the market price of the acquired company’s shares from being unduly manipulated. In practice, however, such a requirement poses an obstacle for a financial institution to accomplish the acquisition, for other competitors can make a competitive offer after they learn of the proposed offer and may end up being the successful bidder. Therefore, most financial institutions in Taiwan contemplating on acquisition hesitate to initiate the acquisition through public tender offer and get around the public offer requirement by reducing the percentage of shares of the target company or acquiring the shares of the target company through share exchange or in an auction. If financial consolidation is a desirable goal, the government should reconsider the possibility of exempting financial institutions from the applicability of the public tender offer requirement.

The Adequate Role of Financial Restructuring Fund Another important task of facilitating financial consolidation will be to improve the financial condition of those financial institutions with poor performance so as to increase its marketability to be acquired by another financial institution. In Taiwan, the Financial Restructuring Fund (the “Fund”) was established in 2001 to create an exit for financial institutions with unsound operations, so that they may withdraw from the market “quietly and smoothly,” that is, without leveling a financial crisis. Currently, qualified candidates for the assistance from the Fund includes institutions with negative net worth, institutions unable to pay off the debts, or institutions with deteriorating financial condition considered by the competent authority as incapable of continuing operation. The Fund can be used for paying off the debts of the target institution with the condition that the Central Deposit Insurance Corporation (CDIC), the designated executive body of the Fund, takes over its assets and dispose such assets by sale. In the case where the liability of the target institution exceeds its assets, the Fund can also be used for settling the exceeding liability. Accordingly, the Fund improves the financial condition of






financially distressed institutions to the extent that they can be likely targets of acquisition. However, the Legislature has recently amended the relevant laws so that the government may appropriate the Fund only up to NT$110 billion. Moreover, after July 10 of this year, the fund may not be used to deal with new problematic financial institutions, although it may be used by the government to carry on the remaining tasks of assisting the existing problematic financial institutions if the government’s decision is made before the said date.

Other Incentives for Encouraging Consolidation The FSC recently announces several incentives for encouraging financial consolidation:

1. The proposed amendments to the Law Governing Mergers of Financial Institutions will model the Enterprise Mergers and Acquisition Act and offer several tax incentives to induce mergers, including deferred land value increment tax, and exempt stamp tax, deed tax, income tax, and securities transfer tax arising from transfer of business.

2. FSC will assist financial institutions engaging in M&A to reduce their post-merger adjustment costs. Specifically, in the past, the goodwill as a result of a merger is required to be amortized within five years after the merger takes place. Now the government recently announced that it may consider permitting the goodwill to be listed as an asset in the book so long as it continues to exist. Loss incurred in the goodwill, while required to be disclosed immediately, may be amortized in 15 years.

3. Under the current legal framework, a FHC planning to invest in a bank, insurance company, or securities house is required to acquire at least 25% of the shares in that institution at one time. Such restriction has been criticized as placing an unrealistic burden on the FHC, because the requirement overlooks the common practice for an institution planning on acquisition to acquire a small interest in the target to test the water. Recently, the FSC announced to relax such restriction and allow a qualified FHC to be able to invest in other financial institution for a minimum share percentage of 5%. Such a measure is welcomed by financial institutions as further opening the door for hostile mergers.

4. Priority approvals will be given to local financial institutions with over 10% market shares if they intend to establish branches overseas and to acquire foreign financial institutions.

5. Establishing a sound system to evaluate the market value of financial institutions is also important. The FSC will set up certain assessment standards for FHCs, including criteria regarding post-merger operating performance and quality, and provide incentives for institutions that meet the criteria whereas encouraging those failing to meet the standards to consolidate with others.

6. In the mean time, the FSC will continue to halt the establishment of new local banks as well as branches, except for those created as the result of mergers or acquisition. However, the SFC indicates that a foreign financial holding company that meets certain requirements, such as the minimum BIS ratio, sound operation and management, excellent credit and so on, may be recognized as an FHC that is eligible for acquiring a wholly owned subsidiary bank in Taiwan (In Taiwan, ownership of a bank is normally limited to 25% unless the owner is an FHC or is approved by FHS for the purpose of managing a troubled financial institution).

7. The government also intends to create one or two show cases of financial consolidation through its controlling banks.

8. An M&A advisory taskforce will be established, which shall invite international financial consulting firms to provide professional assessments and recommendations for feasible forms of consolidation.

However, certain policies should also be reviewed. The time may have come for the government to reexamine the policy of freezing the branch establishment. Although the government’s intention is to increase the value of the local banks, especially those with deteriorating financial situation, so as to make them more attractive and likely targets in a merger, such restriction interferes with the free market and the price determination, causing local banks to unreasonably raise its price and thereby deterring, rather






than facilitating, the consolidation. Therefore, the government should consider allowing at least certain well-operating financial institutions to establish branches.

Proper Financial SupervisionAs much as financial consolidation is important to promote a healthy financial sector, public confidence is still the underpinning of all successful financial reforms. Reforms and trends in the financial sector cannot take place unless the public has confidence in the financial system as it undergoes transformation and unless the public sees a benefit in the changes. Financial consolidation reduces risks through diversification gains, in that institutions may conduct businesses across regional or even national borders, as well as across financial products and services. On the other hand, financial consolidation makes it possible for certain institutions to shift toward riskier asset portfolios, increasing operational risks and managerial complexities. In addition, the larger size and more complex organization of a consolidated financial institution means that the complications of winding down when it becomes financially distressed shall be great and disorderly. Therefore, effective financial supervision should be risk sensitive, and a critical element of improved risk-based supervision is risk-based capital standards that are tied more closely to economic risks. Capital standards provide an anchor for virtually all other supervisory and regulatory actions and can support and improve both supervisory and market discipline. Early intervention policies triggered by more accurate capital standards are important in crisis prevention. In this regards, Taiwan, in step with other countries, will implement the New Basel Capital Accord at the end of 2006. The government adopts an encouraging and fully supportive, but non-mandatory attitude towards the use of IRB (Internal Ratings Based) approach for credit risk assessment by banks.

ConclusionAs suggested previously, financial consolidation is an urgent task for promoting the competitiveness of the financial sector of Taiwan. Consolidation not only fosters a healthy domestic financial environment, but also enables local financial institutions to claim a share of the China financial market, thereby enhancing growth in both the financial sector and broader economy. The government should take a proactive role in fostering a friendly environment for consolidation to take place. That is, the government should not only play a pure “facilitator” role and leave the task to the hand of the free market. It should actively orchestrate the outcome by removing the obstacles identified above and furnishing more incentives, so that the financial institutions in Taiwan can stand back and claim the spotlight in the Asian banking map. By: C.Y. Huang Representative Partner Tsar & Tsai Law Firm 8F, 245 DunHua S. Rd., Sec. 1, Taipei, Taiwan, R.O.C. Tel: 886-2-2781-4111 Email: [email protected]






Victor Kung

Senior Executive VP/CFO Fubon Financial Holding Company

Corporate Governance in Taiwan

Corporate Governance in TaiwanTaiwan Financial Services : Trends, Outlook, and Opportunities

US-Taiwan Business Council

Victor KungCFO / Fubon Financial

June 23, 2005

Internationalization of TaiwanInternationalization of Taiwan’’ss

Stock MarketStock Market






3

Foreign Investment in Taiwan’s Stock MarketUS$bn

3.30.3 1.8

11.88.5 10.0

1.6

23.3

15.810.9

6.3 9.0 9.3 11.1

22.9

31.4

41.4 43.0

66.3

80.1

91.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

95 96 97 98 99 00 01 02 03 04 05

Net FlowsCumulative

4

Foreign Ownership in Taiwan’s Stock Market

0%

10%

20%

30%

40%

50%

60%

70%

TSM

CC

HT

FPCC

Hon

Hai

Cathay

Holdings

UM

CC

hinaSteel

Nan

Ya

PlasticsForm

osaC

hemicals

Formosa

PlasticsA

UO

FubonFinancial

ME

GA

FHC

Asustek

CFH

C

MediaTek

CM

OQ

uantaC

omputer

Inc.

Taiw

anM

obileFirstFH

C

20 Largest companies

All Listed companies






Advancing Corporate GovernanceAdvancing Corporate Governance

in Taiwanin Taiwan

6

Corporate Governance Principles

• Protect shareholders’ rights and interests

• Strength the power of the Board

• Fulfill the function of the Supervisors

• Respect stakeholders’ rights and interests

• Enhance information transparency

• Rights of shareholders

• Equitable treatment of shareholders

• Role of stakeholders

• Disclosure and transparency

• Responsibility of Board

OECD TWSE Best Practice






7

Peculiarities in Taiwan’s Governance Structure

•Duality of Board of Directors and Supervisors

•Corporate directors / supervisors

•Only shareholders could be elected directors

•Board nomination of directors not allowed

8

�U.S

Shareholders Shareholders

SupervisoryBoard

Mgmt.

Board

Mgmt.

Comparison of Governance Structure

Shareholders

Board

Mgmt.

Supervisors

�Europe �Taiwan






9

Recent Changes in Governance Structure

•Audit committee to replace supervisors (optional)

•Disallow same corporate to act as both director and supervisor

•Independent director could be non-shareholder

•Board is to nominated directors

10

Independent Director

None(66%)

TWSE Listed Companies

More than One(22%)

One (12%)

More than

One(45%)None(55%)

20 Largest Market Cap






11

Differences in Financial Reporting

Taiwan GAAP differs from US GAAP and IFRS in

•Consolidation

•Acquisition accounting

•Investments in securities

�LCM vs fair value

�LT/ST vs Trading/AS/HM

•Employee bonus

12

Efforts in Financial Reporting Reconciliation

•General direction

Moving toward IFRS

•Specific measures

�Consolidation：SFAS 7 (2005)

�Impairment：SFAS 35 (2005)

�Financial instructment：SFAS 34 (2006)






Thank You

Alex Lee

Managing Director & Head of Taiwan Equity Deutsche Bank, Taipei Branch

New Dynamic of Taiwan Equity Market

New Dynamic of Taiwan Equity MarketThe challenges, threats and responses

Alex LeeCountry Head, Taipei BranchTel: 886 2 2192 2801 / [email protected]






2

04 Market Capitalization of Domestic Companies

Exchange Mkt Cap (US$bn)1 NYSE 12,707 2 Tokyo SE 3,558 3 Nasdaq 3,532 4 London SE 2,816 5 Euronext 2,441 6 Deutsche Borse 1,195 7 TSX Group 1,178 8 BME Spanish Exchange 941 9 Hong Kong Exchang 861 10 Swiss Exchange 829 11 Borsa Italiana 789 12 Australian SE 776 13 Taiwan Stock Exchange 443 14 JSE South Africa 443 15 BSE, The SE Mumbai 388

Source: WF E (World Federation of Exchange, 2004)

3

Exchange Trading Value1 NYSE 11,618 2 Nasdaq 8,767 3 London SE 5,176 4 Tokyo SE 3,220 5 Euronext 2,475 6 Deutsche Borse 1,542 7 BME Spanish Exchange 1,207 8 Borsa Italiana 973 9 Swiss Exchange 789 10 Taiwan Stock Exchange 720 11 TSX Group 655 12 American SE 591 13 Australia SE 525 14 Korea Exchange 489 15 OMX Stockholm 463

04 Total Value of Share Trading

Source: WF E (World Federation of Exchange, 2004)






4

Challenges & Threats to Taiwan Equity Market

� Co’s lack of attentions to minority shareholder value, Corp governance

� Abuse of employee bonus

� Regulators’ conservative stances to deregulation and internationalization

� Regulations are not competitive enough comparing the other regional market

� Mgt of the listed cos are focusing more on the revenue in stead of earnings

� Increasing competitions from other markets for Taiwan co’s IPOs

� Unstable domestic politics and cross-strait relationship

5

What Have been Happening

� FSC is set up on July 1st, 04 to respond to the new market dynamic

� Aggressive amendments to existing regulations-SBL, EB, hedge fund

� Proactive attitudes to improve Corp governance- SH activism, transparency

� Well planned privatization of SOEs

� International Board in underway

� Bright spots in cross strait relationship

� And more to come…..






6

� Companies listed on the TSEC are required to disclose consolidated f inancial reporting semi-annually.

� Financial holding companies and investment holding f irms are required to disclose quarterly consolidated statements.

� TSEC encourages companies to adopt quarterly consolidated f inancial reporting voluntarily.

� The Securities & Futures Institute has incorporated quarterly consolidated f inancial reporting into its “Corporate Information Disclosure & Transparency Ranking System”.

Consolidated Financial Statements

7

� Companies are required to fully disclose the employee profit sharing scheme to ensure that shareholder interest is protected.

� Employee stock bonuses distributed in any one year, when measured by the market value, can not be more than 50% of the net distributable earnings for the year, or that of its net income.

� TSEC listed companies must not distribute earnings to the employees in a way that would disadvantage the shareholders.

Employee Stock Bonuses






8

Employee bonus shares

Source: Deutsche Bank AG est imates , Company data

C o m p a n y R a tin g T icke r

T a iw a n G AA PEx p e n se

b o n u s sh a re s T a iw a n G A A PEx p e n se

b o n u s sh a re s 2002 2003 2002 2003H on H a i B uy 2317 .TW 7.88 5 .71 15.7 21 .6 30% 28% 2.1% 2.6%A s us tek B uy 2357 .TW 4.61 3 .43 17.0 22 .9 32% 26% 1.7% 1.9%B enQ B uy 2352 .TW 3.30 2 .59 11.0 14 .0 24% 21% 3.0% 2.2%Q uan ta B uy 2382 .TW 4.25 3 .57 14.4 17 .1 27% 16% 1.5% 1.4%C om pa l B uy 2324 .TW 3.50 3 .13 9 .4 10 .6 23% 11% 1.4% 1.3%Inventec H o ld 2356 .TW 2.10 2 .01 8 .2 8 .5 5% 4% 0.4% 0.5%A rim a H o ld 2381 .TW 0.80 0 .80 12.8 12 .8 0% 0% 0.0% 0.0%A c c ton B uy 2345 .TW -4 .89 -4 .89 n .a . n .a . 18% 0% 1.3% 0.0%D -L ink B uy 2332 .TW 2.62 1 .94 15.0 20 .3 34% 26% 1.8% 1.9%G em tek B uy 4906 .TW 4.99 2 .90 15.1 26 .0 47% 42% 2.8% 3.4%Zy XE L B uy 2391 .TW 4.17 2 .77 18.3 27 .6 44% 34% 2.1% 2.4%C om pa l C B uy 8078 .TW 5.75 3 .32 10.1 17 .4 34% 42% 2.5% 4.5%H TC B uy 2498 .TW 6.83 3 .30 20.3 42 .2 54% 52% 4.6% 4.4%A U O H o ld 2409 .TW 3.24 2 .08 13.8 21 .4 17% 36% 1.2% 1.8%C M O H old 3009 .TW 1.92 1 .30 22.5 33 .2 9% 32% 0.9% 1.8%Q D I S e ll 3012 .TW 0.18 0 .18 107 .9 107 .9 0% 0% 0.0% 0.0%O ptim ax H o ld 3051 .TW 5.66 2 .25 13.2 33 .1 64% 60% 4.1% 5.4%N any a Tec h S e ll 2408 .TW -0 .44 -0 .44 n .a . n .a . 10% 0% 0.3% 0.0%P rom os H o ld 5387 .TW O 0.09 0 .09 168 .1 168 .1 0% 0% 0.0% 0.0%W inbond H o ld 2344 .TW -0 .25 -0 .25 n .a . n .a . 0% 0% 0.0% 0.0%P ow erc h ip H o ld 5346 .TW O 0.06 0 .06 480 .8 480 .8 0% 0% 0.0% 0.0%TS M C B uy 2330 .TW 2.04 1 .53 22.0 29 .4 41% 25% 0.7% 1.2%U M C B uy 2303 .TW 0.85 0 .70 25.1 30 .4 21% 17% 0.3% 0.6%A S E B uy 2311 .TW 0.74 0 .64 31.7 36 .7 0% 13% 0.0% 0.4%S P IL B uy 2325 .TW 1.40 1 .20 17.7 20 .7 0% 15% 0.0% 1.0%S unp lus B uy 2401 .TW 2.72 1 .60 17.9 30 .3 25% 41% 1.9% 2.6%V ia S e ll 2388 .TW -1 .34 -1 .34 n .a . n .a . 203% 0% 1.6% 0.0%R ea ltek H o ld 2379 .TW 4.74 3 .93 7 .7 9 .3 36% 17% 3.6% 2.7%M ed ia tek B uy 2454 .TW 29 .83 24 .55 7 .9 9 .7 48% 18% 4.3% 2.5%M ac ron ix S e ll 2337 .TW -1 .93 -1 .93 n .a . n .a . 0% 0% 0.0% 0.0%N ova tek B uy 3034 .TW 6.76 5 .04 13.1 17 .5 48% 25% 2.1% 2.0%R ic h tek B uy 6286 .TW 10.35 4 .63 6 .3 14 .1 211% 55% 9.4% 7.5%F araday B uy 3035 .TW 5.20 2 .64 9 .7 19 .1 79% 49% 4.0% 4.6%C atc he r B uy 2474 .TW 6.34 5 .50 15.9 18 .3 34% 13% 1.0% 1.0%A V C H o ld 3017 .TW 2.74 1 .86 11.7 17 .2 29% 32% 2.7% 2.5%D e lta B uy 2308 .TW 3.36 2 .56 14.9 19 .5 24% 24% 1.7% 2.1%U n im ic ron B uy 3037 .TW 1.50 1 .23 14.7 17 .9 15% 18% 1.1% 1.5%C om peq S e ll 2313 .TW -3 .38 -3 .38 n .a . n .a . 0% 0% 0.0% 0.0%S oft -w orld B uy 5478 .TW O 12.15 10 .71 4 .4 5 .0 40% 12% 2.1% 2.6%A verage 34% 21% 1.7% 1.8%

2003 EP S 2003 P E - x R e d u ctio n in EP S D ilu tio n

9

Stronger Shareholder Activism

� Institutional shareholders now are the largest shareholders of companies� More proactive on issues

� Listing of overseas subsidiaries� M&As� Purchase / sales of assets� Capital management

� Dispersed corporate ownerships open the door for LBO� Government also active

� Class action suits� Investor Protection Centre� Financial Supervisory Commission is hawkish

� Outcome� More disciplined corporate actions� Re-rating of good companies & de-rating of bad companies






10

Better Capital Management - Upside to ROE

Company TickerProjected ROE

(%)Potential ROE (%)

2005F 2006F 2005F 2006F 2005F 2006F 2005F 2005F

Downstream electronics ZyXel 2391.TW 3.5 3.8 2.5 2.9 100 77 24.1 36.4Compal C 8078.TW 2.0 2.0 1.6 1.5 9 37 29.8 31.0Advantech 2395.TW 2.8 3.1 2.1 2.1 55 30 29.3 37.9HTC 2498.TW 2.5 2.5 1.1 1.1 -198 269 27.8 21.7

Semiconductors TSMC 2330.TW 7.3 7.7 6.7 6.7 3,521 1,113 18.6 25.7UMC 2303.TW 5.2 6.4 4.9 5.8 2,141 1,998 1.6 2.2Sunplus 2401.TW 4.1 4.2 1.9 2.1 -12 59 20.0 19.5Mediatek 2454.TW 7.0 7.6 6.4 6.9 705 256 29.7 59.5

Electronic components Catcher 2474.TW 2.9 2.8 2.6 2.6 93 101 30.1 58.6Delta 2308.TW 2.2 2.1 1.8 1.8 226 135 15.5 18.9

Steel China Steel 2002.TW 3.1 2.8 1.7 1.3 151 -364 26.7 26.7

Others Formosa Int'l 2707.TW 4.3 4.2 4.3 2.1 27 -15 25.2 25.2Soft-world 5478.TWO 4.9 4.5 4.6 4.2 76 -5 15.7 15.7

Current ratio (x) Quick ratio (x) Excess cash (US$m)

11

Case Study- K reduction - Formosa Int’l

40

60

80

100

120

140

160

180

200

1/3/03 5/3/03 9/3/03 1/3/04 5/3/04 9/3/04 1/3/05 5/3/05

(%)

TaiexFormosa Int'l

1/1,2003 = 100






12

� Foreign investors can now invest in Taiw an by registering w ith the TSEC. No prior approval is required

� Registration is processed on-line between TSEC and the custodian bank

� The registration process has been further simplif ied since April 2005

� Submission of supporting documents is no longer required for those investors that declare its intent of investment as “hedging purpose”

� For those that wish to open multiple trading accounts, the rules have been relaxed substantially

� Changes to the registered particulars of an investor can be done on-line by the custodian bank alone

Registration of Foreign Investors

13

To ease restrictions on securities borrowing and lending, TSEC w ill:

� Abolish the requirement that security borrowing had to be connected w ith a “strategic purpose”

� Remove the on-shore collateral requirement w hen the borrower and the lender are both foreign nationals.

� Securities eligible for SBL include: TW50 constituent stocks, the stocks of companies upon which there are derivative products such as CBs/ECBs, GDRs/ADRs, cover warrants, options

Securities Borrowing and Lending






14

� When foreign investors are involved, TSEC now allows the settlement deadline to be extended to 6pm of the third business day follow ing the date of the transaction.

� This extension rule is applicable to settlement delays ow ing to:

� Holiday/time zone differences

� Communication disruption

� Disputes on the terms of the trade

� Acts of God

Extended Settlement Deadline

15

� Taiw an securities markets employs both a “central order matching system” and “off-exchange trading system”.

Off Exchange transactions are allowed for the following types:� All shares listed on the Gre-Tai Securities Market� Tender offer, Odd lot, and Block trade transactions� Government bonds listed on the TSEC� Physical delivery of securities in connection with the exercise of call/put cover

warrants listed on the TSEC

Block Trade system further relaxed in April 2005: � This applies to a single stock or a portfolio valuing US$0.5mn� 2% +/- deviation from the reference price permitted� Trade is executed during, and after the regular session

Off-Exchange Trading






16

� Industries such as Marine/Air Transport, Telecom/Broadcast, and Fuel Gas are subject to foreign ownership restrictions.

� Eighteen companies listed on the TSEC are subject to such restrictions.

� The market capitalization of those shares that restrict foreign ownership accounts for only 3% of total market capitalization.

� TSEC and FSC continue to ease foreign ownership restrictions through the stock market. The ow nership restriction on the cement industry, for example, w as lif ted in early 2005.

Foreign Ownership Restrictions

17

� Foreign investors may invest in IPO’s by a 1996 ruling.

� Foreign investors are treated the same way as a local investor when taking part in an IPO transaction.

� With the adoption of a new underwriting system on March 1, 2005, foreign investors now have more opportunities in the IPO market. The new underwriting system features:

� Greater discretionary placement power of the underwriter

� Exemption of daily price f luctuation range during the f irst f ive days of listing

� Greater responsibility on the underwriters in maintaining stable share price after an IPO transaction

Foreign Investor Participation in IPO’s

Chung-Cheng Lin

Commissioner Financial Supervisory Commission






Trend & Opportunities of Financial Institutions Consolidation in Taiwan

FSC 1

Trend & Opportunities of Trend & Opportunities of Financial institutions consolidation Financial institutions consolidation

in Taiwanin Taiwan

ChungChung--Cheng Lin, Cheng Lin, Ph.D. Econ.Ph.D. Econ.

CommissionerCommissionerFinancial Supervisory CommissionFinancial Supervisory Commission

June, 2005June, 2005

FSC p 2

��Financial institutions ConsolidationFinancial institutions Consolidation

��Opportunities for foreign investor inOpportunities for foreign investor inTaiwan financial marketTaiwan financial market

��The Role of Financial Restructuring Fund The Role of Financial Restructuring Fund (RTC Fund)(RTC Fund)






FSC p 3

Goals for financial institutions consolidationGoals for financial institutions consolidationAnnounced by the President, four goals for financialAnnounced by the President, four goals for financial

institutions consolidation are as follows:institutions consolidation are as follows:

Halving the number of banks with government

ownership from 12 to 6 by the end of 2005

Halving the number of banks with government

ownership from 12 to 6 by the end of 2005

At least one financial institution either managed by foreign

institutions or listed in overseas markets by the end of 2006

At least one financial institution either managed by foreign

institutions or listed in overseas markets by the end of 2006

GoalsGoals

Developing three financial institutions with 10% of market

shares by the end of 2005

Developing three financial institutions with 10% of market

shares by the end of 2005

Encouraging M&As to reduce

the number of FHCs from 14

to 7 by 2006

Encouraging M&As to reduce

the number of FHCs from 14

to 7 by 2006

FSC p 4

StrategiesStrategies

��Creating Creating National ChampionNational Champion to enhance the to enhance the market force for further consolidation.market force for further consolidation.

��Building a friendly Building a friendly M&AsM&As legal environmentlegal environment��Implementing Implementing differential treatment differential treatment to provide to provide

incentives for incentives for M&AsM&As by FSCby FSC��Encouraging Encouraging foreign institutionsforeign institutions to take part in to take part in

the financial consolidation.the financial consolidation.






FSC p 5

Benchmark for national championBenchmark for national champion

Indicator of scale Indicator of competitiveness

Over 10% of market shares in

terms of total assets

Over 10% of market shares in

terms of total assets

• ROE: 15% or higher• ROA: 1% or higher• Capital Adequacy Ratio: 10%

or higher• Asset quality:(1)Non performing loan ratio:

2.5% or lower(2)Coverage ratio of allowance

for NPLs: 60% or greater

• ROE: 15% or higher• ROA: 1% or higher• Capital Adequacy Ratio: 10%

or higher• Asset quality:

(1)Non performing loan ratio: 2.5% or lower

(2)Coverage ratio of allowance for NPLs: 60% or greater

FSC p 6

A Favorable legal environment for A Favorable legal environment for M&AsM&As

••Financial Institutions Merger Law offered Financial Institutions Merger Law offered several incentives on financial consolidation. several incentives on financial consolidation. ••The laws and regulationsThe laws and regulations governing governing M&AsM&As,,including Financial Institutions Merger law including Financial Institutions Merger law and Financial Holding Company law, and Financial Holding Company law, will be will be revisedrevised to promote to promote M&AsM&As activities.activities.••Suspend licenses of banksSuspend licenses of banks（（including including branchsbranchs））and FHC.and FHC.






FSC p 7

1.1. Automatic approvalAutomatic approval for banks with a non for banks with a non performing loans (NPL) ratio below 2.5% to performing loans (NPL) ratio below 2.5% to engage in certain lines of financial business and engage in certain lines of financial business and investment activities.investment activities.

2.2. For financial institution that achieve a market share For financial institution that achieve a market share of 10% or higher through consolidation, of 10% or higher through consolidation, priority priority approvalapproval for the establishment of overseas for the establishment of overseas branches.branches.

3. For financial institution planning to acquire problem 3. For financial institution planning to acquire problem banks, banks, permission to reopen branchespermission to reopen branches that have that have previously been closed down. previously been closed down.

Differential treatment by FSCDifferential treatment by FSC

FSC p 8

11.. Foreign investments are permitted to hold Foreign investments are permitted to hold up up to 100% sharesto 100% shares of local bank, in the case of of local bank, in the case of FHC, problem banks and stateFHC, problem banks and state--owned banks. owned banks.

2. The FSC will assist MOF in 2. The FSC will assist MOF in divesting its divesting its ownership overseasownership overseas..

3. The FSC will encourage private financial 3. The FSC will encourage private financial institutions to bring in institutions to bring in foreign investmentforeign investment or or international strategic investorsinternational strategic investors..

4. The FSC will help financial institutions with 4. The FSC will help financial institutions with higher ratio of foreign investment to be higher ratio of foreign investment to be listed listed in overseas markets.in overseas markets.

Foreign institutionsForeign institutions’’ participationparticipation






FSC p 9

The significant M&As events in Taiwanese market

Since June 2002:Since June 2002:(A) 14 Financial holding companies ((A) 14 Financial holding companies (FHCsFHCs) have) have

consolidated 9090 financial subsidiaries,including:including:1515 banks, including one Hong Kong based bank. banks, including one Hong Kong based bank.

88 insurance companiesinsurance companies1414 securities firms securities firms

66 bill finance companies.bill finance companies.(B) Banks (B) Banks M&AsM&As eventsevents：：1010 dealsdeals(C) Securities firms (C) Securities firms M&AsM&As eventsevents：：99 dealsdeals(D) Insurance companies (D) Insurance companies M&AsM&As eventsevents：：55 dealsdeals

FSC p 10

Financial Restructuring Fund (RTC fund)Financial Restructuring Fund (RTC fund)

�The RTC fund was established in July, 2001 with initial fund size of US$4 billion US$4 billion and additional US$3 billion in 2005.and additional US$3 billion in 2005.

� Providing an “exit mechanismexit mechanism”” for weak financial institutions

� Providing a blanket guarantee for depositors and creditors

� Phase out after 10 July 200510 July 2005






FSC p 11

How the RTC Fund WorksHow the RTC Fund Works (cont(cont’’d)d)

�the Fund will be used to settle the settle the deposit and nondeposit and non--deposit claimsdeposit claims on failed financial institutions.

�The Fund shall take over failed financial institutions and dispose them.

FSC p 12

AchievementAchievement�� The RTC fund has handled:The RTC fund has handled:

(1) (1) 4545 community banking institutions community banking institutions (2) (2) 22 banks banks

�� Most of them have been disposed by Most of them have been disposed by whole bank whole bank purchase & acquisitionpurchase & acquisition ..






FSC p 13

Restore to limited deposit insurance

��After July 10 2005After July 10 2005, it will be restored to limited deposit insurance scheme: (1) Each depositor is insured up to

NT$1 million NT$1 million currentlycurrently(2) Deposit Insurance Fund will be

substantially replenished to enhance the function of a financial safety net.

FSC p 14

Opportunities for foreign investor in unities for foreign investor in Taiwan financial marketTaiwan financial market

� Allow to engage in a hostile takeover in financial sector(1) A FHC is allowed to invest in a financial related enterprise

by holding at least 5% shares of such enterprise.(2.) FHC Law: A FHC can hold up to 100% shares of a bank,

Insurance company and/or securities firm. (3) Banking Law: a single person or an entity is allowed to hold

up to 25% shares of a bank (no exclusion to foreign investors)

(4) No shareholding limits are set for investors who intend to acquire a problem bank (no exclusion to foreign investors).






FSC p 15

Opportunities for foreign investor in unities for foreign investor in Taiwan financial market Taiwan financial market (cont(cont’’d)d)

�A foreign FHC will be allowed to acquire financial subsidiaries in Taiwan up to 100% ownership of local banks , insurance companies and any other financial institutes.

�Foreign investors of a FHC in Taiwan can hold up to 100% of ownership.

�Acquisition more than 70% shares by a single shareholders triggers delisting.

FSC p 16

THANK YOU FOR THANK YOU FOR YOUR ATTENTION!YOUR ATTENTION!

Henry Lin

Chairman Securities Investment Trust & Consulting Association of the R.O.C.






A New Phase of Fund Industry in Taiwan

SITCASITCA

【【Taiwan Capital Market Development & OpportunitiesTaiwan Capital Market Development & Opportunities】】

A New Phase of Fund Industry A New Phase of Fund Industry in Taiwanin Taiwan

ByByHenry LinHenry Lin

Chairman of SITCAChairman of SITCAJune 23,2005June 23,2005

2

SITCASITCA

AgendaAgenda

�� New Regulation for Fund New Regulation for Fund IndustryIndustry

�� Mutual Fund in TaiwanMutual Fund in Taiwan�� Offshore Fund in TaiwanOffshore Fund in Taiwan�� Pension Fund in TaiwanPension Fund in Taiwan






3

SITCASITCA

New Regulation for Fund IndustryNew Regulation for Fund Industry

��Investment Trust and Consultancy Investment Trust and Consultancy Act ( ITCA) Act ( ITCA) -- Effected Nov 1, 2004Effected Nov 1, 2004

��Focus on investor protection schemeFocus on investor protection scheme�� Introduce private placement fundIntroduce private placement fund��New mechanism for offshore fund New mechanism for offshore fund

distributiondistribution��Upgraded SRO role of SITCAUpgraded SRO role of SITCA

4

SITCASITCA

Mutual Fund in Taiwan Mutual Fund in Taiwan -- TrendTrend

0

10

20

30

40

50

60

70

80

90

Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 May-05

AUM (Billion USD) 1.Equity 2.Balance 3.Bond 4.Others






5

SITCASITCA

Mutual Fund in Taiwan Mutual Fund in Taiwan -- DetailDetailAs of : May 31, 2005

Fund type AUM(Billion USD)

01. Local Equity (close) 0.1202. Local Equity (open) 7.4103. Local Equity (listed oversea) 0.2504. Oversea Equity 2.8005. Balance 5.0106. Local Bond 61.1507. Oversea Bond 0.3508. Multi-manager 1.2909. ETF 1.3910. PGF/PPF 0.3011. MMF 0.0012. Index 0.0513. Reits 0.30

Total 80.42

6

SITCASITCA

��SICEsSICEs provide consulting service onlyprovide consulting service only��Mainly distribute through bank Mainly distribute through bank

channelschannels��As of May 2005 As of May 2005 --

��840 offshore funds approved840 offshore funds approved��Est. AUM to be US$ 40 Est. AUM to be US$ 40 bilbil.. ((CerulliCerulli, May , May

2005)2005)

Offshore Fund in Taiwan Offshore Fund in Taiwan -- CurrentCurrent






7

SITCASITCA

��New distributing mechanism New distributing mechanism ��Other than consulting, IPO, marketing Other than consulting, IPO, marketing

and advertising activities can also be and advertising activities can also be involvedinvolved

��Except banks, new distributing Except banks, new distributing channels include channels include SITEsSITEs,, SICEsSICEs,,Securities broker, Securities broker, ……

��AUM will AUM will grown at 20% rate annually grown at 20% rate annually (est. by (est. by CerulliCerulli))

Offshore Fund in Taiwan Offshore Fund in Taiwan -- New New

8

SITCASITCA

��Master Agent (MA) systemMaster Agent (MA) system��Better investor Service & protectionBetter investor Service & protection��Centralized information (& trading) Centralized information (& trading)

platformplatform��Who can be MA? Who can be MA?

�� SICE, SITE, Bank and Securities broker SICE, SITE, Bank and Securities broker ��Minimum capital requirementMinimum capital requirement

�� US$ 2.3 mil. (NTD$ 70 mil.)US$ 2.3 mil. (NTD$ 70 mil.)

Offshore Fund in Taiwan Offshore Fund in Taiwan -- NewNew






9

SITCASITCA

Pension Fund in Taiwan Pension Fund in Taiwan -- CurrentCurrent

AUM(Billion USD)

LaborInsurance

LaborPension

PublicServicePension

Total

1.Local Investment 14.07 12.47 5.45 31.982.Oversea Investment 0.29 0.02 0.48 0.793.Both 2.72 2.72Total 14.36 12.49 8.65 35.50

0.002.505.007.50

10.0012.5015.00

LaborInsurance

LaborPension

PublicServicePension

Billion USD 1.Local Investment 2.Oversea Investment 3.Both

10

SITCASITCA

��Labor Pension ActLabor Pension Act -- Effected Jul. 1, 2005Effected Jul. 1, 2005

��Change from Defined benefit to Change from Defined benefit to Defined contributionDefined contribution

��Two parallel tracksTwo parallel tracks�� Individual Account Individual Account �� Annuity InsuranceAnnuity Insurance

Pension Fund in Taiwan Pension Fund in Taiwan -- NewNew






11

SITCASITCA

��Labor Pension ActLabor Pension Act -- Effected Jul. 1, 2005Effected Jul. 1, 2005

��Contribution rateContribution rate�� Minimum 6% for employerMinimum 6% for employer�� Maximum 6% for employee (optional & Maximum 6% for employee (optional &

tax deferred)tax deferred)��Government guarantee minimum Government guarantee minimum

yield rate yield rate


12

SITCASITCA

Pension Fund in Taiwan Pension Fund in Taiwan -- NewNewNew Labor Pension Fund - Effected Jul. 1, 2005

(Employee contribution not included)

4.84

24.19

48.39

72.58

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

One Year 5 Years 10 Years 15 Years

AUM (Billion USD)






13

SITCASITCA

��Opportunities for Fund IndustryOpportunities for Fund Industry��Discretionary account to Pension Discretionary account to Pension

Supervisory Commission Supervisory Commission ��Pension product to enterprise & Pension product to enterprise &

individualindividual��Financial advisoryFinancial advisory


Sherry Lin

Director, Head of Taiwan Research Credit Suisse First Boston

Current Status, Trends and Outlook

Taiwan financial services Current status, trends and outlook

23 June 2005

Sherry Lin

Head of Taiwan Research

Financial analyst, Greater China

886 2 2715-6366

[email protected]






2

Taiwan financial sector: market’s view

Source: CEIC, CSFB

�Taiwan financial sector has been de-rated since 1990 and remains historical low

Taiwan financial sector price to book ratio (x)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Dec-9

0

Dec-9

1

Dec-9

2

Dec-9

3

Dec-9

4

Dec-9

5

Dec-9

6

Dec-9

7

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

3


Source: CEIC, CSFB

�However, profitability of the sector has rebounded strongly

-15%

-10%

-5%

0%

5%

10%

15%

20%

1990 1992 1994 1996 1998 2000 2002 2004-0.80%-0.60%-0.40%-0.20%0.00%0.20%0.40%0.60%0.80%1.00%1.20%

ROE of Taiwan banks ROA of Taiwan banks (RHS)






4


Source: CBC

�And cost of capital is falling....

0%1%2%3%4%5%6%7%8%9%

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

10-year bond yield

5

Consolidation is inevitable

0

500

1000

1500

2000

Hong Kong Indonesia Malaysia Korea Singapore Taiwan Thailand Australia China

Deposits Loans

Hirschman Herfindahl Index – Asia Banks

Source: Central Bank Data, CSFB Analysis






6

1.50%1.75%2.00%2.25%2.50%2.75%3.00%3.25%3.50%3.75%4.00%

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Margin: competition suppresses margin

Net interest spread at domestic banks

Source: FSC, CSFB

7

0%

2%

4%

6%

8%

10%

12%

14%

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

0%

10%

20%

30%

40%

50%

60%

70%

80%

NPL ratio - 180 days NPL ratio - 90 days NPL coverage ratio (RHS)

Asset quality – significantly improved

Source: TEJ, CSFB

� Systemic risk reduced substantially� Banks wrote off 80%+ of NPLs with preprovision profits� There is room to lift coverage ratio to weather a down cycle

NPL ratios and NPL coverage ratio of Taiwan domestic banks






8

Government is important driver

� Government still owns/controls 50% of the banking sector

� 8 out of top 10 banks in Taiwan are government owned/controlled

Ranking Reuter's code Bank/FHC name Market share1 Not listed Bank of Taiwan 9.2%2 5854.TW Taiwan Cooperative Bank 7.5%3 2886.TW Mega FHC (ICBC + Chiao Tung Bank) 7.0%4 Not listed Land Bank of Taiwan 6.4%5 2892.TW First FHC 5.6%6 2880.TW Hua Nan FHC 5.5%7 2801.TW Chang Hwa Bank 4.9%8 2891.TW Chinatrust FHC 4.5%9 2881.TW Fubon FHC 4.3%10 2834.TW Taiwan Medium Business Bank 3.9%11 2882.TW Cathay FHC 3.5%12 2887.TW Taishin FHC 2.4%13 2822.TW Farmers Bank 2.0%14 2890.TW Sinopac Holdings 1.7%15 2808.TW International Bank of Taipei 1.5%16 Not listed Shanghai Commercial Bank 1.5%17 2807.TW International Bank of Taipei 1.4%18 2884.TW E Sun FHC 1.3%19 2847.TW Ta Chong Bank 1.2%20 Not listed Central Trust of China 1.0%

Top 20 banks in Taiwan

9

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-10%

0%

10%

20%

30%

40%

50%

60%

Net fee incom e as % of total incom e Net fee incom e growth (RHS)

Fee income growth accelerates

Net fee income as % of total income

Source: TEJ, CSFB

�Deregulation on financial products�Operator’s cross sell initiatives






10

0%

10%

20%

30%

40%

50%

60%

70%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040%

5%

10%

15%

20%

25%

Cost to income ratio Expense growth

Operating efficiency

Industry expense growth and efficiency ratio

Source: TEJ, CSFB

� Active cost management – operation rationalization� Stronger top line growth – revenues synergy

11

Conclusion

�Taiwan banks managed through tough �Market valuation has yet factored in improving

profitability�A fragmented market structure is the threat�Successful consolidation should lead to re-

rating�Government plays the key role






12

DisclaimerFor important disclosure information regarding the Firm's rating system and potential conflicts of interest, please email:[email protected] or call (877)291-2683 (US based phone number).The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including CSFBC's total revenues, a portion of which is generated by CSFBC's investment banking activities.

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including CSFB's total revenues, a portion of which are generated by CSFB's investment banking activities.

Analyst’s stock ratings are defined as follows:Outperform: The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months.Neutral: The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months.Underperform**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.*For Asia/Pacific, Latin America, and Emerging Markets, stock ratings are relative to the relevant country index (rather than the analyst’s industry coverage universe).**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts rate at least 15% of their universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions.Restricted: CSFB policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of CSFB's engagement in an investment banking transaction and in certain other circumstances.Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. All IPO stocks are automatically rated volatile within the first 12 months of trading.

Analyst’s coverage universe weightings are defined as follows:Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.CSFB’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution*Outperform 35% (48% banking clients)Neutral 42% (41% banking clients)Underperform 20% (36% banking clients)Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Copyright Credit Suisse First Boston, and its subsidiaries and affiliates, 2005. All rights reserved.Please follow the attached hyperlink to an important disclaimer <http://www.csfb.com/legal_terms/disclaimer_asia.shtml>.

David P. Sun

President, Cathay Securities Corporation Senior Vice President, Cathay Financial Holdings

Trends, Outlook, and Opportunities

Cathay Financial Holdings

Taiwan Financial Services:Trends, Outlook, and Opportunities

David P. SunJune 23, 2005






2

The Need For Consolidation

87%

76%

38%

93%

Sgp HK S. Korea Taiwan

Number of Banks

2419

3

48

Taiwan HK S. Korea Sgp

Market Share-Top 5 Banks

3

Reshaping the Financial Industry

Restructuring/Privatization

Consolidation

RegionalExpansion

• Key players：• Government authorities• Foreign private equity• Domestic private financial institutions• Global financial institutions

• Taiwan continues to be on the cusp

• Regional expansion opportunities






4

Roles Foreign Investors May PlayConsolidation

Alternative Benefits

State–owned + State–owned

State–owned auctioned–off

Private–owned +Private–owned

• Create dominant player

• Create national champion

• Restructuring potential

• Broad foreign and domesticbuyer interest

• Create strong competitor

• Synergy potential

• Foreign and domestic strategic buyer interest

Issues

• Limited synergies• Outside buyers excluded

• Potential lower valuation

• Need fair and transparentprocess

• Not attractive to financial buyers

• Limited restructuring

• Limited consolidation

5

Taiwan Financial Sector Remains Attractive for Foreign Investors

• Consolidation will happen• Continued growth in consumer banking• Continued growth in new financial products and capital

markets• Development of pension market• Opportunity to upgrade banking skills and operations• Springboard for expansion into Greater China region






Steve Wang

Chairman Chinese National Futures Association

The Latest Development of the Derivatives Market in Taiwan

Chinese National Futures Association

The latest development of the derivatives market in Taiwan

Chinese National Futures AssociationChairman

Mr. Steve Wang


TAIFEX Milestones1997.03 Futures Trading Law was promulgated

1997.9.9 The Taiwan Futures Exchange(TAIFEX) was established

1998.7.21 1st equity futures contract(TAIEX Futures) was launched

2001.12.24 1st options contract(TAIEX Options) was launched

2002.11 Futures Advisory business was opened

2003.12 Managed Futures business was opened

2004.1.2 1st bond futures contract Gov. Bond Futures was

launched

2004.5.31 30-day CP Interest Rate Futures was launched

2004.10.14 Award the " Derivatives Exchange of the Year 2004" by

Asia Risk

2005.3.28 Electronic Sector & Finance Sector Index Options were

launched







Market Structure

TAIFEX Settlement

Banks

Clearing Member FCMs

CTA CPO

Customers

Introducing Broker

Non-Clearing Member FCMs

Position limit

Clearing & Settlement

Trade Confirmation

Trade Registration

Place Order

Clearing Arrangement

Place Order

Place Order Trade

Confirmation

Funds Consulting


100% Electronic Trading

TAIFEX ETS

CCITT X.25

FCMs’ ProprietarySystem

T19600 or 64K

Information Vendors

Lease linesBroadcasting

Public Network

Information users







Market Growth

59,146.38

277.91 1,077.671,926.79

4,351.397,944.25

31,874.93

2.22 4.527.11

19.2532.03

128.07

237.14

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1998 1999 2000 2001 2002 2003 20040

100

200

300

Tot a l Tr adi ng

Vol umeAver age Dai l y

Uni t ： 1, 000 cont r act s


World Ranking

85.17% 237,144 85.56% 2059,146,376 2004

299.80% 128,067 301.23% 2631,874,934 2003

66.40% 32,033 82.60% 357,944,254 2002

170.77% 19,252 125.84% 384,351,390 2001

57.23% 7,110 78.79% 441,926,789 2000

103.39% 4,522 287.8% 471,077,672 1999

-2,223 -57277,909 1998

Growth Rate

Ave. Daily Trading Vol.

Growth Rate

World Ranking

Market Turnover

Year







ProductsFutures • TAIEX Futures • TE Futures • TF Futures • Mini-TAIEX Futures • TSEC Taiwan 50 Futures

• Government Bond Futures • Commercial Paper Interest Rate Futures

Options TAIEX Options Finance Sector Index Options Electronic Sector Index Options Equity Options


Ave. Daily Trading Volume Futures & Options

Avg Trading Vol . of 2004

35,445

7,773

6,274

9,022

25

175,298

1,640

271

1,397TAIEX Futures

Mini-TAIEX FuturesTE FuturesTF FuturesTAIWAN 50 Futures

TAIEX OptionsEQUITY OptionsGovernment Bond Futures30-Day CP Interes t Rate Futures







Volume Allocation by ProductsCPF 0.35 %

G BF 0.1 1%

T5F 0.42 %

TX O74 .10%(4 3,82 4,511 )

TX14 .98%(8 ,861 ,278)

MTX 3.2 9%

Electro nic Sec torInd ex Future s 2.65%

Finan ce Sec tor Ind exFu tires 3. 81%

Equ ity O ptio n 0.6 9%


Volume Allocation by Market Users

MarketMakers17.05%

SecuritiesDealers

0.43%FuturesDealers8.84%

Foreigners4.53%

Fundsandother int'

traders3.15%Individuals66%







Foreign Participation Procedure

Designate a custodian bank to: Apply for a foreign institutional investor

(FINI) registration number from the Taiwan Stock Exchange Corp (TSEC)

Apply for an approval of opening hedge accounts from the TAIFEX to exempt position limit required by product rules ( Futures 1,000 contracts, Option 2,000 contracts)

Open hedge accounts with consigned brokers


Foreign Participation Procedure

Offshore Investors Banks

Foreign Exchange

Banks TSEC

Designated Custodian Banks

Designated Securities Brokers

Designated TAIFEX Participating Firms

TAIFEX TAIFEX (30% the greatest) (30% the greatest)

TSEC TSEC (At least 70%) (At least 70%)

Account Opening Account Opening (Hedge Account*) (Hedge Account*)

Remittance Remittance

Margins Margins Settlement Settlement Account Account Opening Opening

Place Orders Place Orders

Total Remitted Fund Total Remitted Fund

Letter of Letter of Permission Permission

Application Application

Deposit Deposit

Remittance Remittance







Development on Foreign Participation

• Planning on allowing foreign trading at TAIFEX for speculative and arbitrage purpose

• Feasibility of recognition of omnibus accountsStudying cross-border cooperation

• Continuously evaluating cooperative opportunities with peer exchanges


Product Development

– Gold Futures – DRAM Futures – Energy Futures – Interest Rate Futures of different terms – Foreign Exchange Futures & Options







International Networking• Member of the renowned International

Organizations: FIA (1999), IOMA (2000), SFOA (2002), and Affiliate member of IOSCO (2004)and WFE (2004)

• Signatory of the International Information Sharing MOU and Agreement in 1999

• Bilateral MOU

Nov. 27th, 2002 Korea Futures Exchange (KOFEX) June. 23rd, 2003 (TIFFE) Aug. 22nd, 2003 Chicago Board of Trade (CBOT) Feb. 9th, 2004 Tokyo Commodities Exchange (TOCOM) Oct. 29th , 2004 New York Mercantile Exchange (NYMEX)


International Networking

• Continuously evaluating cooperative opportunities with peer exchanges

• Received No-Action Letter from CFTC 1.June 2nd, 2004 on TAIEX & Mini-TAIEX

futures 2.May 16th, 2005 on TE &TF Futures







Q & A

Chinese National Futures AssociationWebsite:http://www.futures.org.tw/Contact personAndrew HsuTel: +886 2 87737303#821Fax: +886 2 27728378E-mail: [email protected]




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TAIWAN FINANCIAL SERVICES: TRENDS, OUTLOOK, … · TAIWAN FINANCIAL SERVICES: TRENDS, OUTLOOK, AND OPPORTUNITIES JUNE 23, 2005 1 ABOUT …