Macro Economic Analysis Taiwan 530

MATERIALE NPV – RIPRODUZIONE VIETATA

Socially Responsible Investments in APAC emerging markets

State of the art updated on may 21, 2008


2

2008 05 21 – SRI in APAC Emerging Markets

MACROECONOMICS ANLYSIS OF THE FINANCIAL SECTOR IN TAIWAN

Taiwan at a glance

Financial market overview

Banking sector

Stock market

Bond market

Development issues


3


Territory

- 31,688 km2

Population

- 22.95 million

Capital

- Taipei

Government System

- Democracy

Administrative Divisions

- 2 municipalities / 16 counties / 5 provincial cities

Currency

- TWD, semi-flexible exchange rate, 1 EUR = 47.865TWD (2008.05.23)

Languages

- Mandarin, Taiwanese

Ethnicities

- Han (92%) and Taiwanese aborigines (2%)

Religion

Buddhism, Islam, Taoism, Christianity

Source : China Statistical Yearbook, NPV analysis

TAIWAN AT A GLANCE


4


5.77

-2.17

4.64

3.50

6.15

4.164.89

5.70

4.32

1.25

-0.01 -0.20 -0.28

1.612.31

0.60

1.80

3.86

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000 2001 2002 2003 2004 2005 2006 2007 2008E

Taiwan GDP 2000 - 2008

- ECONOMIC DEVELOPMENT

321,230

291,694 297,668 305,624331,007

355,958 365,503383,303

413,164

5.77

-2.17

4.64

3.50

6.15

4.16

4.89

5.70

4.32

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 E

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00GDP (million US) GDP Growth Rate

Taiwan is the 21th largest economy in

the world (2006*)

Considering the GDP per capita,

Taiwan is the 36th in the world in 2006

( at $USD 16,274 )

Taiwan’s 2007 GDP amounted to

$USD 383,303 million, along with a

consistent growth since 2002. The

CAGR of Nominal GDP in 2000-2007 is

??? %

Taiwan’s growth has consistently

(except 2001) been higher than CPI

inflation, indicating a positive real

growth

Economic Outlook for 2008:

The latest world economic projection

shows that the growth of global economy

may be moderately slow in 2008.

Taiwan’s export is anticipated to mildly

increase. With the improving domestic

sector contribution, real GDP is predicted

to grow by 4.32% in 2008.

Source :DGBAS, NPV analysis *: until 2008/ April

GDP Growth rate and CPI¹ 2000-2008

TAIWAN AT A GLANCE

%USD Million

*


5


INDEX

Taiwan at a glance


Banking sector

Stock market

Bond market

Development issues


6


Over the second half of the 20th century, Taiwan has transformed itself from a predominantly agrarian economy

into a vigorous industrialized economy, a process that may be summarized in three main phases: Taiwan’s economy transform has gone through three phases of development:

Phase 1: 1949 to 1980Shift from Agriculture to

Manufacturing

In 1949, the Central Bank relocated with the government from Mainland China to

Taipei . A highly successful land reform program launched Commonly, bonds

issued by the government as compensation for the agricultural lands confiscated

and redistributed were utilized by the former landlords as collateral to secure loans

with which they started up manufacturing and other businesses.

Phase 2: 1981 to 1999Ongoing Industrial Development

Beginning in the 1980s, the government implemented a series of measures to

liberalize and internationalize the economy and privatize state-run enterprises.

Labor-intensive industries, once the mainstay of Taiwan's economy, gave way to

technology- and capital-intensive industries.

Phase 3: from 2000 onwardsReform for Sustainable

Development

Globalization, trade liberalization, and the rise of neighboring China as an

economic power pose new challenges for Taiwan's economic development in the

new century. To meet them, the government has taken measures to upgrade

Taiwan's industries, implemented financial reforms to foster a more attractive

investment environment.

FINANCIAL MARKET OVERVIEW- HISTORY

Source :Taiwan Yearbook 2007, NPV analysis


7


2 phase financial reforms have been conducted from 2000 :Background Taiwan opened its market for new banks in the early 1990s. As a result, 16 new banks were established and left

behind an “over-banking” problem. More specifically, while market competition stimulated the development of

the financial markets, the overly competitive banking market deteriorated banks’ asset quality, narrowed their

interest spread and reduced profit margin from them.

For example, the market share of the top 5 banks in Taiwan only accounts for 38%, while the figures in Korea

and Hong Kong are 87% and 76% respectively. In other words, Chinese Taipei lacked big and good banks.

Over-regulation was another problem in our financial market. Previously, banks were considered as policy tools

aiming to support our manufacturing industry. This situation inevitably restricted the effectiveness of market

mechanism and limited the competitiveness of our financial markets.

The goal of the first reform aimed at resolving the non-performing loan problems.

For the purpose, the previous financial regulator, the Ministry of Finance (MoF), lowered business tax of financial institutions from 5% to 2% and the Central Bank lowered deposit reserves to encourage bad debt write-offs.

The Ministry of Finance established the Financial Restructuring Fund (or RTC fund) and created Asset Management Companies to deal with distressed financial institutions and resolve their deteriorated assets.

FINANCIAL MARKET OVERVIEW- RECENT DEVELOPMENT

Phase of Financial ReformⅠ (started in 2000)

Source :Financial Supervisory Commission , NPV analysis


8


The MoF enacted the Financial Institution Merger Act and the Financial Holding Company Act to create a better M&A legal environment and lessen the adverse effect of over-banking.

The results of the first reform are significant. The average NPL ratio of domestic banks reduced from 11.27% in 2001 to 2.39% in June 2006.

In addition, 14 financial holding companies have been established since 2001. However, since there are only few M&A deals in recent years, the number of our banks is still large.

To promote integrated financial supervision, we have also enacted a law aiming at the integration of several supervisory agencies. The Financial Supervisory Commission was established on July 1, 2004 to consolidate the supervision of banking, securities and insurance sectors, and to act as a single regulator under the Executive Yuan.

FINANCIAL MARKET OVERVIEW- RECENT DEVELOPMENT

Phase of Financial Reform (started in 2004 till now)Ⅱ

The key objective of phase financial reform is Ⅱ consolidation and promoting Taiwan as a regional fund-raising and asset management center.

The four goals of market consolidation are: (1) three banks with market share over 10% by the end of 2005; (2) halving

the number of state-owned banks by the end of 2005; (3) reducing FHCs (4)financial institutions with foreign investment.

To speed up financial M&As, the FSC has been trying to create an environment beneficial for consolidation, not only for domestic financial institutions but also for foreign investors.

It revises outdated regulations to be in line with international norms, implements differentiated supervisory measures to encourage well-performing financial institutions, and offers incentives for consolidation. .

Source :Financial Supervisory Commission , NPV analysis


9


10.04

9.98

10.43

10.52

10.56

% Of Total Nominal GDP

Source :CSRC, CBRC, NPV analysis

• Financial Service Industry accounts for around 10% of total GDP.

• Financing, Insurance, and Securities and futures represents 65.7%, 24.6% and 9.7% of total

financial market.

• Financing has been decreasing gradually from 2003-2007

FINANCIAL MARKET OVERVIEW- BREAKDOWN OF FINANCIAL SERVICE INDUSTRY

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

Financing Insurance Securities and Futures


10


GDP & Capitalization (2002-2007)

NTD (billion)

• Market Capitalization start to surpass GDP from 2003

• Market Capitalization is growing faster than GDP

• Stock Market Capitalization to GDP Ratio keeps growing from 2002 (89.22%) to 2007 (171%)

Source :Taiwan Stock Exchange , NPV analysis

0

5000

10000

15000

20000

25000

2002 2003 2004 2005 2006 2007

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

GDP Market Capitalization Stock Market Capitalization To GDP Ratio

FINANCIAL MARKET OVERVIEW


11


Taiwan at a glance


Banking sector

Stock market

Bond market

Development issues

MACROECONOMICS ANLYSIS OF THE FINANCIAL SECTOR IN TAIWAN


12


Source :FSC, NPV analysis

BANKING SECTOR

- STRUCTURE 1/5

Executive Yuan

Central Bank of R.O.C (Taiwan)

Financial Supervisory Commission( Regulator )

Domestic Banks

Local Branches of Foreign Banks

Credit Cooperatives

Taiwan Post Co.

　 Banking Bureau

　 Securities and Futures Bureau

　 Insurance Bureau

　 Financial Examination Bureau

　 Supportive Departments : - International Affairs Departments - Legal Affairs Department - General Planning Department - IT Department - Secretary Office

Credit Departments of Farmers’ & Fishermen’s Associations


13


Central Bank - Central Bank of the Republic of China (Taiwan)

In December 1949, the Bank relocated with the government from Mainland China to Taipei

In November, 1979, the newly revised Central Bank of China Act was promulgated. While the Bank has

since been under the Executive Yuan (Cabinet), its independent role in making monetary policy has

not been changed.

the Bank's operational objectives include promoting financial stability, ensuring sound banking operations,

maintaining the stable internal and external value of the currency and, within the scope of the above three

objectives, fostering economic development.

The main functions of CBC: Monetary Management Foreign Exchange Management Clearing and Settlement Service Currency Issuance Treasury Agency Functions Bank Examination Statistics and Research Participation in International Organizations ;

Source :CBC, NPV analysis

BANKING SECTOR- STRUCTURE 2/5


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Regulator: Taiwan Financial Supervisory Commission

Financial Supervisory Commission (FSC) was inaugurated and commenced operation since 1 July 2004 .

FSC functions act as a single and independent regulator that directly reports to the Executive Yuan. Main goal : consolidate the supervision of banking, securities and insurance industries under one roof, as well as to

integrate the tasks of examining these industries. The FSC includes 4 bureaus and 5 supporting departments. 4 bureaus

- The Bureau of Monetary Affairs

- The Securities and Futures Bureau

- The Insurance Bureau

- The Examination Bureau is in charge of the examination of all financial institutions. It is worth mentioning that the newly organized Examination Bureau integrates examination staff from the CBC*,

BOMA** and the CDIC***, which provides better administrative and human resources to conduct financial examination

under one agency. 5 supporting departments

- International Affairs Departments

- Legal Affairs Department

- General Planning Department

- IT Department

- Secretary Office

} responsible for the supervision of financial institutions.

BANKING SECTOR- STRUCTURE 3/5

* CBC : Central Bank of Republic of China (Taiwan)

** BOMA : Bureau of Monetary Affairs

*** CDIC : Central Deposit Insurance Corporation


15


billion TWD

• As of the year-end 2007, the total assets of the banking sector amounted to TWD 38235 billion, an

increase of RMB 501 billion from 2006.

• During the same period, the total liabilities reached TWD 36069 billion, an increase of TWD 433 billion.

Source :CBRC 2007, NPV analysis

BANKING SECTOR- BANKING ASSETS AND LIABILITIES

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

2003 2004 2005 2006 2007


16


BANKING SECTOR- FINANCIAL INSTITUTIONS ASSETS BREAKDOWN

• Domestic banks occupy the majority of total asset and account for 72.8% of total.

• Local branch of foreign banks keep increasing

• Credit Cooperatives, Bills Finance Companies and Trust and Investment company are decreasing gradually.

• Credit Departments of Farmers' and Fishermen’s Associations have no significant change Source :FSC , NPV analysis

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007 Domestic Bank

Local branch of foreign banks

Credit Cooperatives

Bills Finance Companies

Trust and Investment companies

Credit Departments of Farmers' Associations

Credit Departments of Fishermen's Associations

The Postal Savings System


17


BANKING SECTOR- DEPOSITS AND LOANS

billion NTD

• As of the year-end 2007, total deposits and total loans outstanding amount to 25245 and 18019 billion, respectively

• Loan to Deposit Ratio keeps at about 70% in the latest 4 years

Source :FSC, NPV analysis

0

5 000

10 000

15 000

20 000

25 000

30 000

2003 2004 2005 2006 2007

66.0%

67.0%

68.0%

69.0%

70.0%

71.0%

72.0%

73.0%

Deposit Loan Loan to Deposit Ratio


18


Billion TWD

• The quality of assets improved dramatically due the Financial Reform from 2000.

• By the end of 2007, the NPLs of major commercial banks totals TWD 337.4 billion, a decline of TWD 38

billion from end-2006. The NPL ratio was 1.79 percent, with a decrease of 0.8%

- NPLs1 OF DOMESTIC BANKS

BANKING SECTOR

Source :FSC , NPV analysis Note 1: Non-Performing Loans

0

100

200

300

400

500

600

700

800

900

2003 2004 2005 2006 2007

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Total NPL NPL Ratio


19


-2

0

2

4

6

8

10

12

2003 2004 2005 2006 2007

ROA ROE

- ROA and ROE of Domestic Bank

BANKING SECTOR

• ROE reduced dramatically from 10.3% (2005) to -0.43% (2006)

• ROA and ROE decrease from 2005 due to Double-card debt crisis (credit card / cash card ) and over

competition.

Source :FSC , NPV analysis Note 1: Non-Performing Loans


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Taiwan at a glance


Banking sector

Stock market

Bond market

Development issues

MACROECONOMICS ANLYSIS OF THE FINANCIAL SECTOR IN CHINA


21


Source :TSEC, GTSM , NPV analysis

Stock Market

- STRUCTURE 1/5

Financial market

Taiwan Stock Exchange / TSEC

(exchange market)

GreTai Security Market / GTSM

(OTC market)

Stock

Emerging Stock

　 Bond

　 Derivative

Stock

TDR (Taiwan Depository Receipts)

　 Warrant

　 Bond

Beneficiary Certificates

ETF

　 Beneficiary Securities


22


Taiwan Stock Exchange / TSEC

The CSRC was founded in 1992. It is an institution of the State Council of the People's Republic of China

(PRC). It is the main security (finance) regulator that responsible for conducting supervision and

regulation of the securities markets in accordance with the law

In August 1997, The State Council decided to put the securities markets in Shanghai and Shenzhen

under the supervision of the CSRC

In November 1998, Organizations engaged in securities formerly supervised by the People's Bank of China

were put under the centralized supervision of the CSRC

Product and Service

Stock / TDR (Taiwan Depository Receipts) / Warrant / Bond /Beneficiary Certificates / ETF/ Beneficiary

Security Its responsibilities include:

Formulating policies, laws and regulations concerning markets in securities and futures contracts; Overseeing issuing, trading, custody and settlement of equity shares, bonds, investment funds; Supervising listing, trading and settlement of futures contracts; Supervising futures exchanges; securities and futures firms; Granting the qualification of law firms, accounting firms, asset appraisal firms, and professionals in

these firms

STOCK MARKET- REGULATOR ( Exchange Market )

Source :CSRC 2007, NPV analysis


23


GreTai Security Market / GTSM

The government reopened the over-the-counter trading of bonds in October 1982.

The Taipei Securities Dealer's Association (TSDA) started handling over-the-counter trading of stocks in

February 1988. In 1994, this non-profit organization with the mission to develop the over-the-counter market was named

Gre Tai Securities Market (the GTSM) Since its inception in 1994, GreTai Securities Market (GTSM) has been endeavoring to play the role of a

family and aspires to be the "protagonist of economic vitality and the cradle of successful businesses" to

help businesses grow and develop, drive the upgrade of industries and enhance competitiveness in the

international markets. Product and Service

Stock / Emerging Stock / Bond / Financial Derivative

STOCK MARKET- REGULATOR ( OTC Market )

Source :GTSM, NPV analysis


24


• From 2003-2007, Taiwan stock exchange market has grown consistently and stably.

• In 2007, the market capitalization reaches 21,527 billion TWD and growth rate is 11.1% from 2006.

• In 2007, the Trading Value reaches 33,527 billion TWD and growth rate is 38.6% from 2006

• In 2007, the Capital Issued reaches 5601 billion TWD and growth rate is 1.4% from 2006

billion TWD

- OVERVIEW

STOCK MARKET

Source :FSC Financial Outlook Monthly, NPV analysis

0

5000

10000

15000

20000

25000

30000

35000

40000

2003 2004 2005 2006 2007

Capital Issued Market Capitalization Trading Value


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Number of Listing

- COMPARISON BETWEEN EXCHANGE AND OTC MARKET

STOCK MARKET

Market Capitalization

Trading Value Trading Volume

• TSEC and GTSM occupy 91.89% and 8.11 % of the Market Capitalization respectively in 2007.

• TSEC and GTSM occupy 85.56% and 14.44 % of the Market Capitalization respectively in 2007

• TSEC and GTSM occupy 85.80% and 14.20 % of the Market Capitalization respectively in 2007.

0

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007

GTSM TSEC

0

5000

10000

15000

20000

25000

2003 2004 2005 2006 2007

GTSM TSEC

0

5000

10000

15000

20000

25000

30000

35000

40000

2003 2004 2005 2006 2007

GTSM TSEC

TWD (Billion)

0

20000

40000

60000

80000

100000

120000

2003 2004 2005 2006 2007

GTSM TSEC

TWD (Billion)TWD (Billion)


26


- MARKET PERFORMANCE 2007

STOCK MARKET

Source :TSEC , GTSM NPV analysis

• In the first 3 quarters of 2007, both TAIEX

and GTSM Index keeps the growth

momentum in the previous year

• TAIEX opened at 7920 and closed at

8509.56, with a rate of yearly increase

7.39% in 2007.

• GTSM Index opened at 164.71 and

closed at 154.47, with a rate of yearly

decrease 6.22% in 2007.

• In the 4th quarter, the indices fall down

due to the impact of US sub prime crisis

as well as the concern that the market

has gone irrational and the bubble is

about to break

GTSM INDEX and Trading Volume

Turnover ( T

WD

$ 100 million)

Volum

e-Weighted Index

TAIEX and Trading Volume


27


0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2003 2004 2005 2006 2007

STOCK ON TSEC STOCK ON GTSM EMERGING STOCK ON GTSM

P/E Ratio

- COMPARISON BETWEEN EXCHANGE AND OTC MARKET

STOCK MARKET

0.00

100.00

200.00

300.00

400.00

500.00

2003 2004 2005 2006 2007


Turnover Ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2003 2004 2005 2006 2007


Average Earning Per Share Average Market Value Per Share

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2003 2004 2005 2006 2007


• Emerging Stock on GTSM owns the highest P/E Ratio, but decrease dramatically from 2006 to 2007.

• Stock on GTSM owns much higher turnover rate than the others.

• Stock on TSEC owns the highest Average Earning Per Share and Average Market Value Per Share.


28


Taiwan at a glance


Banking sector

Stock market

Bond market

Development issues



29


BOND MARKET- Overview

Source :Chinabond 2007, NPV analysis

The turnover in the bond market in 2007 reached NT$193,644.6 bi l l ion (convertible bonds and

corporate bonds with warrant excluded)

NT$93,178.7 bi l l ion involved out right trades, accounting for 48.12% of total turnover and representing a decrease of 45.04% as compared to 2006

Government bonds still represented a lion’s share in outright trade, accounting for as much as 98.74% of all outright trades, followed by corporate bonds with 0.41%, financial debentures with

0.15%, beneficiary securities with 0.17%, strip bonds with 0.07%, and foreign bonds with 0.46%.

The turnover of RP/RS trades totaled NT$99,857.9 billion in 2007, representing a decrease of 5.49% from NT$105,663.9 billion in 2006.

Since 2003, practically all outright trades of government bonds went through the GTSM electronic bond trading system (EBTS). In 2007, the amount of outright trade that went through EBTS reached NT$88,596.5 billion, accounting for 95.08% of outright trades in the market,


30


• Trading Value started to decrease from 2005, with -16.03% and -24.47% growth rate in 2006 and 2007

respectively.

• Outstanding has kept growing slightly from 2003 to 2007.

• At the end of 2007:

• bond trading volume reaches 133,382 billion

• bond outstanding is 5,612 billion TWD

BOND MARKET- OVERVIEW

Source :FSC, Securities and Futures Bureau , 2007, NPV analysis

Unit:NT$ Billion

-

50,000

100,000

150,000

200,000

250,000

2003 2004 2005 2006 2007Trading Value Outstanding

GTSM Market


31


BOND MARKET- BOND ISSUE BY Product (GTSM)

Source :Chinabond 2007, NPV analysis

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2003

2004

2005

2006

2007 Government Bond

Financial Debenture

Beneficiary Securities

Straight Corporate Bond

Corporate Bond with Warranty

Convertible&ExchangableCorporate Bond

Foreign Bond

International Bond

Amount outstanding

• Government Bonds and Corporate Bonds dominate the market, despite their volatility from year to year.

They occupy around 80% of the volume

• Financial debenture and Beneficiary certificate are the two main sector that keep growing for these 5 year.

Especially for Beneficiary certificate


32


Taiwan at a glance


Banking sector

Stock market

Bond market

Development issues



33


DEVELOPMENT ISSUES- FUTURE PROSPECT

Updating of financial regulations

-Drafted bills under review in the Legislative Yuan

Efforts to create a secure and efficient financial environment - Stronger credit risk control - Implementation of the Basel Capital II Accord - Outlook for Taiwanese banks (competitiveness) - Securities firms to act as depository and manage client funds - Integration of securities and futures self-regulatory organizations - Continued development of the Taiwan ETF market - Strengthening the solvency of insurance companies - Amending the insurance product review system - Continued review of the Taiwan Residential Earthquake Insurance system

- Financial institutions urged to implement a loan pricing policy

- Enhancing the preventive function of financial examinations

Internationalization of the financial industry - Pushing for internationalization of Taiwan's capital market - Promoting corporate governance - International cooperation Financial literacy initiatives

Source :FSC Annual Report 2007, NPV analysis

Documents

Macro Economic Analysis Taiwan 530