We Know Asia

...

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

---------------------------------------------------------------

Yuanta’s Next Step[pic 6][pic 7]

Islamic finance in Taiwan is still in early stages; hence there are no self-innovated products in domestic market.

In 2008, Polaris ( 寶來) Securities had once

developed an Islamic finance product called MSCI Taiwan Islamic Index. Unfortunately, due to the barriers from both externally and internally, the IPO ended up in failure. Looking on the bright side, Yuanta can learn from this first-hand experience. Our suggestion is for Yuanta to mirror from the path of Hong Kong’s development on Islamic finance (e.g. aiming for Islamic professional investing institutions as its main customers).

The weakest bound of the current layout of Yuanta is undoubtedly the absence of a stronghold that links the South-East Asia. Consequently, the primary focus of Yuanta’s future M&As would be on Malaysia, Thailand and Singapore. Certification of operation in either three will enable Yuanta to trade in those countries without

barriers. It is said that the next wave of Islamic banking will be driven by QISMUT: Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey and according to statistics, Malaysia owns 20 % of the Islamic banking market share, while Indonesia owns 4.6%. For reasons above, it is urgent for Yuanta to head into the ASEAN market and connects the dots.[pic 8][pic 9][pic 10]

---------------------------------------------------------------

SWOT of Promoting Islamic Captial Market in Taiwan[pic 11]

1 (see footnote)

Shanghai-Hong Kong Stock Connect

SH-HK Stock Connect is a program that links the stock markets in Shanghai and Hong Kong. This program enables investors to trade shares in both markets by their local brokers.

Yuanta (Korea)

With the launch of the program for over a year, Yuanta Korea has made massive profits from this investment channel. Yuanta attracted its Korean investor by advertising the slogan “We know China”, successfully convincing its customers that the company has expertise in the field. In terms of the SH-HK Stock Connect, Yuanta is now placing 2nd in the Korean market,

...