Team members :
Motivation
While attending the recruitment orientation held by Yuanta Securities in the career
fair, the speaker mentioned that Yuanta are now aggressively heading forward to the Asian
market, with its intention to be the largest regional brokerage. After research, we realized
that Asian Cup is now a primary focus. Many of them are trying to enlarge their business
scale to become international companies. For example, Yuanta securities merged the Tong
Yang Securities, and KGI Securities is planning an IPO in Hong Kong. How can Taiwan
design our best layouts to make the overall securities industry become global? After this
study, we hope to come up with a possible arrangement that will magnify the Taiwan
brokerages enough to compete with other regional brokerages in Asia.
Current situation of Taiwan
The securities market in Taiwan had grown rapidly during the 80s. Our industry
structure turned into IT industry then, which drew a lot of funds from the securities market.
After that, Taiwan became an economy that thrived in the high-tech industry, the securities
market also became flourish. However, since the securities market in Taiwan has reached a
saturated level recently, and the countries in the U.S, Europe, and Asia have been
expanding their securities market oversea, its necessary for us to expand our securities
business. This is one of the reasons that we are attending the Asian Cup. Furthermore,
there is a geographic location advantage for Taiwan. We have the culture and language
advantage entering the Greater China district, and the abundant funds and high liquidity in
our securities market will be a great support heading forward to Asian Cup.
The preparation of Taiwan
There are several preparations of Taiwan entering Asian Cup. And the most
important are the loosen requirements for securities brokerages joint ventures abroad. First,
if theres a need for the joint ventures abroad to exceed 40% of the net value, the
brokerages with capital adequacy ratio above 200% can apply the approval from the FSC
as special cases. Second, brokerages can give endorsement for financing of overseas
subsidiaries. Third, the limitation of extension of monetary loans to others in the part of
overseas joint ventures has been changed. The limitation has risen from 40% to 100% of
the net value.
necessary. We could increase the ability through raising the amount of capital, also
leading to a rising level of shift in investment..
4. Financial Innovation-Merely underwriting foreign financial instruments can earn only
limited profits. If the security brokerages can develop their own product, attracting
specific group to buy it, itll create more opportunity to make profits.
5. Restriction-Although the FSC has loosened some restrictions when entering Asian
Cup, there are still plenty of rules and laws needed to be revised to help expanding. The
restrictions may become a huge barrier for brokerages in Taiwan when competing with
others. Also, there are limitations in entering Greater China region.
6. OSU Platform-Constructing a well-developed platform of OSU is also urgent, itll
help companies expand easier.
Core Integration
In contrast to the top five banks of South Korea, Hong Kong, and Singapore, with
their total market capitalization at least 50% of the local market share (which is good for
promoting healthy markets), after synthesizing Taiwan's top five banks, the market share is
still low. As the largest securities channel in Taiwan, Yuanta made a leap into the seventh
largest bank in the country after the M&A with Ta Chong Bank, even so, it is still not large
enough to keep pace with the top well-known international banks.
In order to compete in the Asian Cup, Yuanta should continue to seek domestic
merger/consolidation to expand the scale of assets. If Yuanta successfully evoke the wave
of consolidation, it could accelerate the pace of layout in Asia because the larger the
financial institutions are, the more advantages there are to play in the Asian Cup. Take
DBS, the largest commercial bank of Singapore as example, over the past 20 years, it
underwent several mergers and acquisitions domestically.
Environment is conducive to integration
During this new era, when community, cloud, big data and network are flourished, the
financial industry environment develops toward the financial Internet of Things, driving
new patterns of financial to rise. Under this situation, the investing demand in IT
foundation works is increasing. However, small and medium banks could not afford to
invest in IT, so it is hard for them to survive. Moreover, Financial Supervisory
Commission set up the plan of "Bank 3.0", and with the convenience of digitizing, the
proportion of people heading to branches personally greatly reduce. Hence, some banks
have begun to reduce the number of branches and replace the teller services with digital
financial services. The result of digital finance is that the branches have been abolished
gradually, and the value has gradually declined. Thus, we can conclude that the current
environment is unfavorable to small sized financial institutions or branches.
After Yuanta Financial Holdings announced that it spent NT $ 56.55 billion merging
Ta Chong Bank this year, the number of banks up for sale on the market has reduced. The
value of existing small and medium banks is diminishing, and in order to be sold for a
decent price, the sooner the selling is, the better. Otherwise, if those banks wait until major
domestic financial holdings "buy enough", they may not be sold for an acceptable price or
even will face difficulties exiting the market. In addition, the bankers are now facing the
succession problem. Second generation is not necessarily interested in operating banks, for
they may not have the intention or they may be unable to continue operation, therefore
increasing the possibility of mergers and acquisitions.
Besides, recently the authority has urged integration and might address stronger
capital requirements to push ahead financial integration. FSC Chairman, Tseng
Ming-Chung, indicated that the goal FSC set is the birth of one to two regional banks
within three to five years, that is, assets must be 6 to 7 trillion. The largest domestic bank,
Bank of Taiwan, contains only 4.3 trillion, so the scale is still not enough and must be
strengthened through merger/consolidation. Zhan Ting Chen, the bank director also said
that financial holding synergy has been increasing in recent years. Obviously, the banks
ROA and ROE under the financial holdings are significantly higher than banks that do not
join one. He also pointed out that after a period of time, FSC might advance the capital
requirement schedule of new Basel agreement (Basel III). As mentioned above, Yuanta can
grasp the opportunity to implement domestic integration as soon as possible.
Islamic Finance
Islamic finance, a banking activity that matches with the principles of Sharia
(Islamic law), has been expanding rapidly over the past decade. Growing at a double-digit
rate, the Sharia-compliant financial assets has now approximately US$2 trillion,
representing up to 1% of total world assets. The Sharia compliant finance is now a
non-negligible part of the financial industry, especially to ASEAN members such as
Malaysia, Indonesia and Singapore. Therefore, in order to obtain the Asian Cup, it is
crucial for Yuanta to take part in this emerging market.
Islamic financial system, including Islamic banking, Sukuk (Islamic securities),
Takaful (Islamic insurance) and Islamic Funds, refers to financial activities according with
the Islamic Law (Sharia).
from
the
path
of
Hong
Kongs
Malaysia,
Thailand
and
Singapore.
(see footnote)
, available at
http://report.nat.gov.tw/ReportFront/report_detail.jspx?sysId=C10203342
Yuanta Securities is on rating watch negative due to the announcement that YFHC2 is
to acquire all the shares of Ta Chong Bank in a transaction valued at TWD56.6bn.
2
Ta Chong's shareholders will receive TWD8.15 in cash and the equivalent of TWD8.15 in
YFHC's shares for each Ta Chong share. The transaction value includes YFHC's purchase
of Ta Chong's existing European convertible bonds, which are to be converted to common
shares. Although there is scope to enhance the group's banking franchise and synergies,
Fitch expects the group's financial flexibility to be weakened by the transaction, which is
likely to be financed through a mix of capital from YS, and debt and share issuance at
YFHC. Yuanta group management says that YFHC's double leverage ratio could rise to
about 115%-120% from 106% at end-June 2015 following the acquisition, and its
sum-of-parts capitalization will fall to about 115%-120% from 130% at end July-2015.
Fitch expects the group to buttress its balance-sheet strength in the long-term by pursuing
more moderate growth and sustaining sound earnings generation.
The VaR, Capital Adequacy Ratio and risk equivalent amount ratio of Yuanta
Yuanta uses the model of VaR to quantize the integrated market risk, and utilizes the
result to manage, monitor and measure the market risk. At the same time, Yuanta securities
make the CAR and risk equivalent amount ratio in proper level.
Every quantized risk items are showed below:
Thousand dollar
2014 year
Risk items
The mean of
The minimum
The maximum
VaR
of VaR
of VaR
Equity risk
241,611
227,324
168,052
310,687
Interest risk
52,385
43,211
31,280
58,404
2,189
2,653
1,254
5,316
Product risk
2,064
3,925
10
8,869
Subtotal
298,249
277,113
Less: assets
(15,034)
(12,482)
283,215
264,231
210,565
338,684
diversification
effect
Total
Source: Yuanta.
449%
533%
Maximum minimum
592%
450%
Source: Yuanta.
10
Market risk
53%
Credit risk
22%
Operating risk
25%
Source: Yuanta
Two saving and one expansion: including saving the cost of integrating systems, saving the cost of time
and labor, and expansion of the future system.
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promoted the policy of Bank3.0 in 2015. Under the policy, the financial industries in
Taiwan have more space for development and opportunities to design new products. Here
are some changes in Taiwan:
Innovation products and service situation
New products or services
Content
TAIEX
derivative In the past, foreign investment bank is the mainstream,
products and PGN can be but now we can underwrite the products by ourselves.
priced
by
foreign
currency
Introduce the sale of OBU are open-shelf. Partial financial holdings obtain
RQFII
fund
from the qualifications and coda of RQFII through
overseas
reinvestment in Hong Kong, breaking the situation of
foreign investment only issuance.
Online deposit/ loan, FSC promotes finance3.0, and financial institutions in
credit card appliance, Taiwan opens many services online.
subscription of mutual
marketing Consent, etc.
Source: Yuanta
In recent years, banks promote high interest rates of RMB certificate deposits (CD).
Under the condition, Yuanta securities advanced others by promoting PGN4 of RMB, and
the return rate was up to 3.5% every three months, which was higher than the CD project
of high interest rates in deposit banks. On the other hand, Yuanta securities also can learn
from KGI.
KGI brings its ELN5 and PGN into full play. Nowadays, the OSU of KGI leads the
industry and issue the first TAIEX ELN priced by USD. After the permission that OSU
brokerages can underwrite the TAIEX derivative products, we can expect our local
securities to take back the leadership instead of being taken over by other international
investment banks. Furthermore, in response to the opening of wealth management business,
relative products of PGN and ELN can also be adjusted by the respective wealth
management business. For Yuanta, developing the distinctive products to attract different
clients will enrich not only the profit but also the market value.
4
5
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market in China, causing more cost. Because the content of ECFA hasnt been clear, we
hope that itll be possible for the RQFII to be separated from the implement of ECFA.
There has been 13 countries that is qualified for the RQFII, the total limits has reached
Renminbi 970 billion. Getting the 100 billion RQFII for Taiwan, we can invest the A-share
market directly, and itll bring us an even better development in the Greater China area.
Construct a well-developed OSU platform7
In order to earn back high net worth individuals from Singapore and Hong Kong,
making Taiwan become a regional financial center, the government has allowed security
brokerages to apply OSU (Offshore Securities Unit) since 2013. However, there are still
rooms for improvement to enhance our OSU system.
1. Learning from Singapore
Although both Taiwan and Singapore dont allow their own currency be traded in
their OSU, Singapores ACU (Asian Currency Unit) note that, as long as the trade does not
relate to Singapore Dollar, they (also people living in Singapore) can get the tax incentives.
On the other hand, only PI (professional investor) in Taiwan can undertake OSU, and the
products available for sale cant be related to TAIEX. Also, the PI doesnt get the tax
incentives in OSU, causing no difference between OSU and DSU (Domestic Securities
Unit). To learn from Singapore, maybe we should change the focus from people to the
currency, that is, you can also get the tax incentive whether you are Taiwanese or not.
2. Learning from Hong Kong
In Hong Kong, theres a structure for custody account, transforming demand deposit
to certificate deposit with no separation of the account. Under this circumstance, the capital
could be used more efficiently. In Taiwan, the OSU has been demand deposit so far, which
is not the best use of the capital. Same as Hong Kong, accounts of Future market in Taiwan
offer the custody account as well, making a lot of profits through it. As a result, maybe itll
be better for OSU to open up to this. Theres not much incentive for PI to transfer from
DSU to OSU since theres no tax incentives, and the DSU can offer even more products.
With lots of restrictions and lack of attractive products, itll be hard for high net worth
individuals to invest in it. If we dont make some changes, we are preventing OSU from
growing.
Available at
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Conclusion
Now, heres our layout for Yuanta. First, the domestic integration is necessary, so we
assume that Yuanta acquire the Capital, achieving the business of scale. Second, we plan to
take part in Islamic Finance which gives Yuanta the chance to generate high profits and
earn the hearts of specific investors. Also the SH-HK Stock Connect provide further
insight entering the Greater China, helping Yuanta expand their business and create
relating products under different circumstances. As for Southeast area, since Vietnam has
become more open, we suggest Yuanta to further develop in Vietnam. Besides all these,
we expect Yuanta to improve their risk management ability, making it easier to expand.
Also, the revise of restrictions and OSU can help construct a better environment for layout.
The ultimate goal is to use Yuanta as a model for other brokerages in Taiwan, hoping to
have regional brokerages in 3 to 5 years. As we thrive in Asian Cup, we may be proud to
say that We know Asia.
Reference
http://udn.com/
http://www.pwc.tw
http://www.csa.org.tw/
http://money.udn.com/
http://www.yuanta.com
https://www.capital.com.tw
http://www.chinatimes.com/
http://news.pchome.com.tw/ PChome
http://www.nownews.com -
http://www.moneydj.com
http://www.twse.com.tw/ch/products/publication/download/0001000357.pdf
http://report.nat.gov.tw/ReportFront/report_detail.jspx?sysId=C10203342
http://udn.com/news
http://twbusiness.nat.gov.tw/
http://www.syscom.com.tw
http://emerging-markets-research.hktdc.com
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