CTBC’s Li: “Changes are imminent across industries after the pandemic”

• Mid- and long-term economic downturns are likely to arise in the long battle against the pandemic
• CTBC Bank’s push towards digital, long-term preparation and immediate response to the pandemic have ensured little to no interruptions in its operations
• Digital transformation will accelerate in all industries, including the financial services sector, once the pandemic is over

COVID-19 has changed public behaviour, as people now avoid travel and physical consumption in response to disease prevention policies. Nationwide or city-level lockdowns – as well as the partial shutdown of businesses – have caused a supply shock, making delays rife in the import of raw materials and the delivery of exports. These conditions brew a perfect storm for businesses to struggle financially, postpone investments, and even close down – resulting in employees being forced to resign, take unpaid leaves, or accept pay cuts.

Although disease prevention measures, as described previously, vary from country to country, they are not permanent solutions considering their negative impacts on the economy. That is why social distancing will prevail as a principle of management.

Vaccine development will take at least 12 to18 months. Thus, the battle against the pandemic will be a long one, with possible economic downturns for the mid- and long-terms.

Addressing COVID-19 through monetary and fiscal policies

Governments have been focusing on monetary and fiscal policies in response to the impacts of COVID-19, some are even working on both. Easing monetary policy through QE (quantitative easing) and reducing interest rates go hand-in-hand with vast sums of financial assistance, which serve as emergency disease prevention funds and provide low-interest loans to affected industries. These funds also ease taxes and processing fees on individuals and businesses.

Take Taiwan’s monetary policy as an example. During the first quarter of 2020 board meeting on 19 March, the Central Bank of the Republic of China (Taiwan) (the Central Bank) reduced the rediscount rate as well as the rates on accommodations with and without collateral by 0.25% to a historic low. Banks in need of additional funds had also been allowed to use their holdings of the certificates of deposit (CDs) and negotiable certificates of deposit (NCDs) issued by the Central Bank to request early withdrawal or take out secured loans. The Central Bank’s reduced interest rate is fully reflected in various bank loans, while the eight major state-owned banks also offer an additional 0.25% reduction in self-use residence loan interest and 0.5% reduction in other consumption loan interest (e.g. credit card, credit loan, or car loan).

With respect to fiscal policy, the Executive Yuan passed an expanded special budget on 2 April. The overall relief plan totals $34.9 billion (TWD 1.05 trillion), roughly equal to 5.5% of the GDP. This includes $23.27 billion (TWD 700 billion) in business relief loans and $3.32 billion (TWD 100 billion) worth of employment subsidy. In this special budget proposal, the Central Bank specially released a $6.64 billion (TWD 200 billion) re-accommodation fund with an interest rate of merely 0.25%, offering inexpensive capital to encourage banks to process relief loans for small and medium enterprises. Finally, people affected by the pandemic with repayment difficulties may also apply to the bank for a 6-month principal and interest extension or a 6-month deferred payment by credit card.

For individual income tax, the Ministry of Finance issued an executive order on 16 March that allows people with difficulties paying taxes on time to either defer payment for one-year interest-free or pay in 36 instalments interest-free.

To support the financial industry, the Financial Supervisory Commission (FSC) is offering a partial easing or grace period in terms of financial supervision. The FSC will also launch the new version of capital accrual regulations on housing loans in the second half of this year as originally planned, as these will help increase capital adequacy ratio and decrease capital increase pressure for banks to undertake mortgage loans. However, since the remaining regulations would require banks to commit more resources to adjust to the system, the FSC is evaluating whether to emulate other countries’ measures of postponing the regulations by one year, allowing banks to focus on issuing loans to businesses affected by the pandemic. Relevant restrictions on investments in real estate by an insurance business have also been temporarily relaxed to boost financial relief. This helps prevent affected businesses from being cut off while also maintaining tenants for insurance enterprises as landlords.

Banking sector can weather the pandemic

The pandemic will bring reductions in interest collection due to lowered rates, handling fees from investors choosing to keep cash on hand, and investment income due to financial market shocks. Along with the inability to fully restore business operations in the short run, these all contribute to heightened default risks. It is also predicted that the consecutive profits and growth in Taiwan’s financial industry will come to a halt this year.

Overall, the loan loss provision to non-performing loans of Taiwan’s domestic banks was 590.24% by the end of February, indicating a higher allowance for bad debts. In addition, Taiwan’s banking industry has a relatively ample level of capital. The industry had an average capital adequacy ratio of 14.07% by the end of 2019 – much higher than the statutory capital requirement of 10.5%. Along with the FSC’s timely easing on supervision, I anticipate that Taiwan’s banking industry should be able to successfully ride out this crisis.

At CTBC, we have 116 overseas locations across 14 countries in four regions. Thus, our business risks and sources of profit are relatively more dispersed. We are less likely to be influenced by a single country, market or region. Furthermore, we have launched digital financial services and implemented digital transformation strategies in recent years, which have prevented interruptions in our customer services.

We immediately established a disease response team as soon as the outbreak started. For our clients, not only do we comply with the government’s relief programme, but our account managers have actively reached out to corporate customers regarding their operational status and need for support. For individual clients, we sent out text messages reminding them to review portfolios. We offer a full rebate on mask-ordering fees, which is available to our digital savings account holders as additional savings.

For our employees, we introduced infrared thermal imagers to measure body temperatures, planned and gradually implemented off-site and work-from-home operations, and re-examined our business continuity plan to effectively disperse business risks and ensure that operations remain uninterrupted.

We also established a task force to help the bank respond to drastic changes in liquidity, credit, and market risks. Other than increasing the frequency of relevant risk examinations and requesting front-desk operations to make timely responses, the middle office risk unit is also asked to conduct stress testing by simulating risk impacts under different contexts to ensure stability in bank operations.

Digital transformation will bring big changes to industries after the crisis

Each institution holds a different view on the pandemic’s conclusion and the economy’s recovery. However, it doesn't really matter which prediction is correct. Everyone believes there will be an end to this pandemic. When it is over, I believe industries will undergo both quantitative and qualitative changes.

I am referring to the possibility of traditional businesses unable to create new innovations in their services and products or a high level of added-value to be eliminated by this pandemic. The surviving businesses will either accelerate or increase their investment in diversification and digital transformation, resulting in qualitative changes.

For the manufacturing industry, there will be time spent on strategising a new and unprecedented global layout. Globalisation will no longer be based on concentrated production for export to major consumer countries. Instead, there will be a transition towards diversification in the long run, meaning the possible existence of multiple production plants and consumer markets. With relatively independent, autonomous production supply chains operating in different locations, businesses would be more willing to invest resources in such new, diversified layouts.

In addition, I believe there will be acceleration in digital transformation across all industries. This may mean the creation of more e-commerce channels or increased collaboration with large-scale e-commerce companies, introducing mobile payment solutions. Many industries are also introducing robotic process automation to reduce manpower requirements. Furthermore, I believe that businesses will consider replacing traditional employment relationships with more flexible solutions, allowing for more effective changes to fixed costs in response to changes in demand, and thereby enhancing the capacity to defend against the next crisis.

Morris Li is the Chairman of CTBC Bank, the largest privately owned bank in Taiwan.