Taiwan learns from life insurers' experience

Due to unknown operating risks and strong domestic competition, Taiwan banks will be careful in penetrating China's banking sector.

That's according to a report titled "Expansion Into China Presents Opportunities For Taiwan Banks, But Caution Will Initially Prevail," published by Standard & Poor's Ratings Services and Taiwan Ratings Corporation.

After lengthy regulatory negotiations, qualified Taiwan banks will likely gain access to China's potentially lucrative banking sector in early 2010. But according to credit analyst Andy Chang, Taiwan banks' previous overseas expansions show their preference for a prudent risk approach at first.

"Accumulating experience in the early years of their expansion plans in China will help banks to control credit risks and maintain adequate capitalisation to support the resource needs for further business growth," Chang quipped.

According to the report, the slightly conservative attitude of China and Taiwan regulators is also likely to encourage cautious expansion, especially at the initial stage. The expansion could accelerate further after negotiations on increasing strategic flexibility are agreed between Taiwan and China's regulators under a special economic cooperation framework. However, even moderate growth involves inherent risk and Taiwan banks are likely to increase their exposure to China only gradually as their strategic flexibility rises. This will limit their credit risk exposure in the first several years.

The experience of Taiwan life insurers, which have already explored business opportunities in China over the past few years, also indicates that a go-slow policy remains the major expansion strategy for Taiwan financial institutions.