TaiwanÆs ICBC weighs offshore investment

International Commercial Bank of China in Taiwan is considering a modest increase in its treasury's investment in domestic and foreign equities, says Beth Wei Meei-yeh, senior executive vice president and general manager of the treasury department.

The bank's assets are above NT$1 trillion ($29 billion), half in the form of loans (30% in New Taiwan dollars and 20% in dollars) and the rest in securities (10-20%) and time deposits (30-40%).

Investments in bonds have increased over the past three years to take advantage of falling interest rates, and today securities provide higher returns than loans, which is new. But since the US Federal Reserve's June federal open market committee meeting raised short-term rates, ICBC has determined that the days of easy money are over.

Its first instinct is to return to more lending, but Taiwan corporates offer few good names, and the top companies can now get cheaper financing from the capital markets. Moreover government lending in Taiwan is now done on a tender basis, which has shrunk margins.

Most of the bank's cash is held overseas in its New York office; the Taipei office also manages assets such as Australian commercial paper or Thai bank paper. Wei says she has looked at 'enhanced' cash funds as a way to improve returns with only a minor increase in credit risk, but top management's conservatism has squashed the idea.

Its fixed-income investments are primarily in domestic corporate bonds, which account for up to 80% of ICBC's bond portfolio. The rest is in US dollar-denominated sovereign debt, with a very small exposure to the euro. Euro-denominated bonds grew to 5% of the total foreign bond exposure last year because of the currency's rise against the dollar, but Wei thinks this has played itself out and ICBC's customers aren't interested in euro-based products, so she doesn't see this exposure growing.

ICBC manages its bond portfolio itself, although for global bonds it has used external fund managers for discretionary mandates. But this year the bank has shaved those allocations as US interest rates have bottomed. It now has only two external managers, Dresdner Bank and Bank of New York. "Initially we used external managers to learn how they do it," Wei says. "If we could get an extra return, that was seen as a bonus. But it hasn't been easy to understand their daily operations; they won't tell us because we're not big enough."

The mandates continue because of previous relationships, however. Dresdner's insurance arm provides product that ICBC sells to its retail base. ICBC has a decades-old relationship with BoNY.

In the immediate future, ICBC is looking to increase its equities exposure, particularly in Taiwan, where it believes the run-up to next spring's Presidential election will see the market post gains. "Afterward we may see interest rates reach fair value and we will rebuild our bond portfolio," Wei says.

Banks can allocate up to 10% of their assets to equities, although ICBC's board of directors has limited the bank to NT$4 billion. "We may ask the board to raise this, although there is no guarantee they will agree," Wei says.

Currently the bank has no international equities exposure. It used to have a position in a long/short fund offered by State Street Global Advisors, but took profits and exited. Although the bank's management doesn't like investing in a hedge fund, it trusted SSgA's brand name.

Wei is looking at returning to the international equity markets, with the first stop euroconvertible bonds issued by Taiwanese companies. Going forward, however, Wei is interested in looking at a global equities fund strategy - but one that is cheaper than the kind of fees a hedge fund demanded. She says the bank is likely to add new managers rather than rely on Dresdner of BoNY, should it make this move.

She declined to reveal ICBC's asset portfolio return target, except to say that the loan portion is below target but the securities side is beating it. The bank is better off than two or three years ago, now that NPLs have been written off and now account for only 1.92% of the loan book.