Syndicated Lending in Taiwan: opportunity amidst challenges
3 February 2015
Crowded banking sector
Taiwan’s banking sector is considered one of the most crowded in the region. With 38 domestic banks and almost an equal number of foreign counterparts, banks are competing hard to get a piece of the pie, which has led to margins nearing rock bottom.
The biggest opportunity for Taiwanese banks was the signing of the pact between Taiwan and China, which opened up the Chinese market and provides growth opportunities for Taiwan’s saturated banking sector. Not surprisingly every bank had an aggressive strategy to tap into growing their business in mainland China from bilateral lending deals to complex syndicated deals.
The fact that China has become Taiwan’s largest debtor and Taiwanese banks’ exposure was valued close to US 100Bn by the end of Q2 2014 has resulted in increasing concerns from the Central Bank and the Ministry of Finance.
Regulator curbs China lending
With the regulator taking steps to curb lending to Chinese corporates, banks in Taiwan can expect larger scrutiny while doing such deals. The impact has already been seen: In Q3 2014, Taiwan’s syndicated lending witnessed one of the worst quarters in the last six years. With banks flush with US dollars, it is becoming imperative for them to look for business in other markets, such as India and Indonesia. As Taiwanese banks’ foray into more overseas markets to grow their syndicated lending business, they will need to overcome competition not only from local domestic banks but also other foreign banks, which enjoy early mover advantage and are well established.
Large foreign banks have continued to use technology to help them establish themselves in overseas markets. State of the art lending systems implemented by these banks have not only helped them in consolidation. Banks have witnessed a ten-fold increase in the number of loans they can bring to market and lowering the time to service loans by up to 85% - leading to higher customer satisfaction. Banks have also experienced a 100% reduction in errors and overall IT savings of more than 40% through reducing the number of systems required to manage loans.
Taiwanese banks, like many other Asian banks, continue to support their commercial complex loan business by using their legacy core banking system, single-function secondary systems, and manual processes. While this setup may have been adequate in the past, it is a poor fit for today’s increasingly complex loans, marketplace dynamics, and regulatory framework, which is becoming tougher to comply with unless banks have complete visibility of their lending books. Core banking systems are especially weak in the areas of loan pricing and options, and multiple transactions.
They also have limited hierarchies and have no syndication capability. This makes it difficult for banks which use the core plus add-ons model for their commercial lending business to participate in the growing market for syndicated and other complex loans. It also poses a challenge for banks (especially midmarket ones) who want to enter new geographical markets quickly in order to be able to serve large regional clients. In addition, fragmentation leads to data re-entry to normalise loan data across systems, as well as the use of spreadsheets, paper checklists and external diaries as workarounds - and to communicate with clients and internally within the bank. Such data re-processing and manual patchwork and reporting are inherently error-prone, thus creating a wasteful need to always have to check for accuracy. As per Celent’s report on the Top 10 Trends in Corporate Banking for 2014: “For most banks in the developed world, the technology that supports the commercial lending business is outdated and fragmented, with literally dozens of third-party software packages, homegrown applications, and less than industrial strength database and spreadsheet solutions being used.”
In the syndicated lending world where relationship managers are faced with stiffer targets to increase revenues for the bank, banks also need efficient middle and back office systems to support front end sales teams. The ability of the bank to efficiently service a loan over its lifespan can be a differentiator in this highly competitive market place. A lack of proper systems poses reputational risk for banks when compared with technologically advanced peers and non-banks players.
Integrated loan technology brings opportunity amidst challenges. Lending continues to be one of the key revenue generators for banks and commercial lending is one of the few bright spots in banking today. Consumer lending helps banks to establish their presence in the market and commercial lending continues to drive higher revenues for the bank. With the criticality of this business function, commercial lending certainly deserves dedicated and state of the art systems.
Amit Chopra heads the Syndicated and Corporate Lending Solution team for Misys in the Asia Pacific. Amit has over 15 years of experience in the region and in lending in both corporate and retail banking. As part of his role at Misys, Amit Chopra is responsible for FusionBanking Loan IQ, which is the market leading system for Syndicated and Bilateral Lending.
This article was originally published in the Asia Pacific Loan Market Association Newsletter – January 2015