Connect to share and comment

Cross-strait banking: More than just business

Taiwan and China may have different motivations, but they both wind up at the bank.

Greener pastures

Still, all that's not stopping Taiwan banks from piling into China. For one thing, they don't have many other options for finding new business. As with many markets in Taiwan, the island's banking market is overcrowded and hyper-competitive.

"There are too many banks, and too few customers [in Taiwan]," said UBS' Lee. "Large Taiwan corporations and SMEs [small and medium enterprises] have moved to China. You can reduce the number of players through consolidation, but the government is not going to push for consolidation because that will mean layoffs — and there are too many elections."

"So the only solution is to move to a new market where you have growth," she said.

Taiwan banks' returns on equity — a common measure of a bank's profitability — are around 2 percent to 5 percent, while ROEs in the mainland top 20 percent, according to Yin, the finance expert. "That's why Taiwan banks are looking at China — it's a big pie over there," said Yin. "It's very profitable in that market."

So far, four Taiwan banks have been cleared to open branches in China. A few more are waiting in the wings. Meanwhile, two of China's state-run banks have been approved to open offices in Taiwan. Their presence will be mostly symbolic, since they can hardly expect to make much money in Taiwan's saturated market.

Well aware of the many challenges in mainland China, Taiwan's banks are starting easy, with the customers they already know — Taiwan businesses operating in the mainland, also called "taishang." Such firms helped kick-start China's export miracle, and punch far above their weight in contract electronics manufacturing and some other sectors.

By one Taiwan government estimate, Taiwanese have invested a cumulative total of $150 billion in China since the early 1990s. Taiwan's Mainland Affairs Council doesn't keep official statistics on the Taiwanese presence in China, but rough estimates range from 100,000 to 150,000 Taiwan firms doing business there.

Taiwan's banks will first go after the taishang market, estimated by UBS at $56 billion. "Their target customers are Taiwanese businessmen," said Yin. "And then after they secure this market, then they will try to get into the local market in China."

UBS thinks Taiwan could snatch up to a third of that market, with Chinese banks and foreign banks keeping the rest.

That's a tiny drop in the bucket compared to China's overall banking market, which includes a staggering $7 trillion in loans and $10 trillion in deposits. But for Taiwan's small banks, the extra business matters. "For them it's peanuts, but for us it's big — it could have a huge impact on Taiwan," said JP Morgan's Hsu.

Provided, of course, that politics doesn't get in the way.