Taiwanese banks, once seen as a gateway into China, look more like a trap for private-equity firms including Carlyle Group LP (CG) as the mainland market proves elusive and competition at home curbs profits for small lenders.

Cosmos Bank Taiwan (2837), controlled by a buyout firm owned by Steven A. Cohen’s SAC Capital Advisors LLC, has lost 68 percent from the end of 2007, data compiled by Bloomberg show. Taipei-based Ta Chong Bank Ltd. (2847), backed by Carlyle, declined 11 percent, while EnTie Commercial Bank, whose owners include Longreach Group Ltd., fell 18 percent in that period.

Investments made more than five years ago in Taiwan’s fragmented banking sector -- whose assets are less than a 10th of China’s -- are underwater with stocks trading below the cost of purchase. Anemic loan growth and margins among the narrowest in Asia, coupled with faster expansion on the mainland and Southeast Asia, may deter foreign and local acquirers.

“It’ll be pretty challenging for the private-equity firms to sell their stakes in Taiwanese banks in the next two years,” Eric Chang, a Taipei-based analyst at Jih Sun Securities Co., said by telephone. “There are no buyers.”

Cosmos and EnTie are two of the three worst performers this year on the TWSE Financial & Insurance Industry Index, which tracks 36 banks, insurers and financial-holding companies. The benchmark gauge has climbed 18 percent, while Cosmos has slumped 19 percent and EnTie by 3.4 percent.

A spokeswoman for Carlyle and a spokesman for SAC Capital declined to comment, while Longreach didn’t return two e-mails.

Unhealthy Banks

Taiwanese lenders, about half of which were unprofitable seven years ago, began attracting attention from private-equity firms in 2006 and 2007 as the government encouraged banks and financial companies to merge.

Optimism that relations with China would improve -- fostered in part by comments by the main opposition party’s leaders that they would seek closer ties if the group was elected -- also led to speculation that local banks would gain access to the mainland’s bigger, more profitable and faster-growing market.

Overseas lenders took note: Standard Chartered Plc, Citigroup Inc., HSBC Holdings Plc and ABN Amro Holding NV were among those to take over and merge local banking assets with their own operations on the island, while Japan’s Shinsei Bank Ltd. bought a stake in a financial-holding company.

The flurry of deals also saw Carlyle, the world’s second-largest manager of alternative assets such as private equity and real estate, vying with South Korea’s MBK Partners Ltd. and Japan’s Orix Corp. for the unprofitable Ta Chong in 2007.

China Gateway

“Taiwanese banks were attractive to the PE firms because they were seen as having a better chance of expanding into the mainland than international rivals,” Chuang Piyen, a Taipei-based banking analyst at Mega Securities Co., said by telephone on Sept. 30. “Unhealthy banks were targeted because they could be turned around and sold at a good price.”

Carlyle and a partner bought a stake in the Taiwanese lender, which had posted a NT$5 billionloss for 2006 on bad-loan provisions, for $650 million at the end of the next year. The buyout firm holds about 24 percent of Ta Chong, according to the Taipei-based lender’s 2012 annual report.

Since then, Ta Chong has slipped to No. 23 among 39 domestic banks ranked by assets, from No. 21 in 2007.

“We believe the likely M&A within domestic Taiwan in the near future will be at small banks owned by private equity, which are seeking exit strategies,” Jemmy S. Huang, an analyst for JPMorgan Chase & Co. in Taipei, wrote in a note to clients in May. “Pricing will be key.”

Below Cost

The holding cost Carlyle about NT$17.50 per share, including the purchase of preferred shares and common stock, according to estimates from Huang, who declined through a JPMorgan spokesman to comment for this story. Ta Chong gained 1.4 percent to NT$10.10 today, 42 percent below that price.

The lender failed to meet its former President Edmund Koh’s February 2010 target of boosting profit fivefold by 2012, from about NT$1 billion in 2009: it posted net income of NT$1.73 billion for last year. The bank’s return on equity, at 6.5 percent for 2012, also missed Koh’s goal of 15 percent.

Carlyle hired JPMorgan to help sell its stake, Reuters reported in April 2012, citing people it didn’t identify. Within a month, Ta Chong said it was told by Yuanta Financial Holding Co. and Fubon Financial Holding Co. that they had stopped procedures relating to a merger with the lender.

The buyout firm will probably sell out at the “proper price” and time, a Ta Chong spokeswoman said in an e-mailed response to questions. An agreement to sell the holding isn’t in the works, she said.

‘Opportunities Diminishing’

Tammy Li, a Hong Kong-based spokeswoman for Carlyle, declined to comment on whether the Washington, D.C.-based company is seeking to sell the stake and whether a transaction is possible in the next two years. Marie Cheung, a Hong Kong-based spokeswoman for JPMorgan, declined to comment on whether the bank is trying to sell the assets for Carlyle.

“We see good exit opportunities diminishing” for private equity firms, Jerry Yang, a Hong Kong-based analyst at Daiwa Capital Markets Hong Kong Ltd., said by telephone. Local targets have become unattractive because “Taiwan financial companies are shifting their focus to overseas expansion rather than domestic consolidation.”

Of the 39 local banks that operate on the island -- down from 42 in 2006 -- only one has more than 10 percent of the market share for loans, according to data from Taiwan’s Financial Supervisory Commission. The island, which has been governed separately from China since 1949, also has three Chinese lenders and 28 foreign banks.

Slower Growth

The size and growth in Taiwan’s financial sector is also dwarfed by neighboring China. Total banking assets on the island grew 6.7 percent from a year earlier to $1.3 trillion as of June, data from the local regulator show. Mainland banks’ assets expanded 12 percent to $16 trillion during the period, according to China’s banking regulator.

“Why would Taiwanese banks want to buy their local peers?” Chang at Jih Sun said. “With the mainland opening up its market to Taiwan, local banks will eye the market there.”

Competition has also driven down the profitability of lending operations for the banks to the second lowest in Asia, according to data compiled by Bloomberg. The average net interest margin in Taiwan for lenders with assets of $5 billion or more is 1.38 percent, only surpassing Japan’s 1.32 percent, the data show.

Slim Margins

That makes Taiwanese banks less attractive to investors, especially given the growth opportunities in emerging markets in Southeast Asia or in China. Average net interest margin of Indonesian banks is 6.5 percent, while the gauge is 3.23 percent in China and 3.67 percent in the Philippines, data compiled by Bloomberg show.

U.S. and European lenders are also unlikely to consider Taiwan, Derek Ovington, regional head of banking research at CLSA Asia-Pacific Markets, said in an interview on Sept. 24.

“It’s not a growing market,” Hong Kong-based Ovington said. “So it’s much more likely that foreign banks will prioritize China first.”

That may be bad news for firms including the Asia-focused Longreach, which holds about 50 percent of EnTie, according to the Taiwanese lender’s 2012 annual report.

Mark Chiba, a former UBS AG banker who founded the Asian buyout firm, said in June 2007 that he expected to turn around the unprofitable bank’s operations in two to three years.

Bank’s Turnaround

EnTie, ranked No. 24 among domestic banks by assets, has posted annual profits since 2009, data compiled by Bloomberg show. The firm’s return on equity was almost 19 percent, making it the second-best performer among the 20 Taiwanese financial companies tracked by Bloomberg.

That hasn’t helped bolster the stock, which trades 34 percent below the NT$23.40 a share that Longreach paid for stakes acquired since June 2007, based on estimates from JPMorgan’s Huang. EnTie rose 1 percent to NT$15.55 today, having fallen 3.4 percent this year.

“The private-equity-owned banks are unlikely to meet all the mainland entry requirements over the next few years,” said Chuang of Mega Securities. “The current prices just reflect that they are unlikely to tap into China anytime soon.”

Longreach, which invests mainly in Japan and the Greater China region, hired Morgan Stanley to sell its entire holding in EnTie, Reuters reported in April 2012, citing a person familiar with the matter. Longreach was seeking at least NT$30 a share, Reuters said the following month.

Less Banks

The buyout firm is working with Morgan Stanley to explore options, a person with knowledge of the matter said last week, asking not to identified because the talks are private.

Harriet Ngan, a Hong Kong-based spokeswoman at Morgan Stanley, declined to comment. Longreach, which has offices in Hong Kong and Tokyo, didn’t reply to two e-mails.

“We are very likely to have four banks less if the financial sponsors sell the stakes to domestic financial-holding companies or banks,” EnTie’s Chief Financial Officer Andrew Lee said last month. He declined to comment on whether Longreach was seeking to sell its stake.

Shinsei Bank, a Japanese regional lender backed by J. Christopher Flowers, held about 35 percent of Jih Sun Financial Holdings Co. (5820), according to the Taiwanese company’s annual report. Shares of Jih Sun Financial, ranked No. 16 among Taiwan’s 17 financial holding companies, added 1.3 percent to NT$8.49 today, 37 percent below the NT$13.40 a share that the stake cost Shinsei Bank.

Shinsei’s Investment

The Tokyo-based lender views its holding in Jih Sun Financial, which it has accumulated since May 2006, as a “strategic investment,” Eiji Ootaka, a Tokyo-based spokesman for Shinsei Bank, said last month. Shinsei also has a business alliance with the Taiwanese company, Ootaka said.

“Our purchase of the stake in Jih Sun wasn’t aimed for an exit after a short period of time, which private equity firms would usually do,” said Ootaka. He declined to comment on whether the bank would consider selling its stake in the next couple of years.

Not all private-equity investments in Taiwanese banks have performed badly.

Shares of Cosmos, ranked No. 34 by assets among domestic banks, are trading at more than twice the NT$7.30 that the holding cost SAC Capital since the end of 2007, based on JPMorgan’s estimates. SAC Capital holds 57 percent of Cosmos while, General Electric Co.’s financial unit holds 25 percent.

The stock advanced 1 percent to NT$14.90 today, 18 percent higher than the NT$12.60 a share that GE Capital spent when it began investing in January 2006.

First Profit

Cosmos, which was among Taiwanese card issuers plagued by defaults, in March 2009 said it would close a fifth of its branches to cut costs after more than two consecutive years of losses. The Taipei-based bank reported a profit for the first time in seven years in 2012.

Jonathan Gasthalter, an external spokesman for SAC Capital from corporate strategy firm Sard Verbinnen & Co., declined to comment on whether the stake would be sold. A spokeswoman at Cosmos, who sent an e-mailed response, declined to comment.

GE Capital doesn’t comment on market speculation and will continue to work with Cosmos to keep strengthening its business franchise, Eric Lee, a Singapore-based spokesman at GE Capital, said in an e-mailed response to questions on Sept. 27.

TPG Capital took a loss on its investment in Taiwan’s Taishin Financial Holding Co., two people familiar with the matter said earlier this year.

The U.S. firm, whose Asian unit was called Newbridge Capital LLC, became the largest shareholder in Taishin after it agreed to buy NT$27 billion of shares and convertible bonds in January 2006. The Fort Worth, Texas-based firm sold stakes in December 2011 and July 2012.

TPG’s rivals, which face a long wait ahead if they don’t want to incur a similar loss, are losing patience, said Chang of Jih Sun Securities.

“The PE firms know that they can’t just expect the share prices to climb back to 2007 levels,” he said. “That is simply unrealistic.”






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