Although Taiwan boasts Asia's fourth-largest financial-services market by revenues, many lenders lose money because of an endemic oversupply of banks. What's more, few banks have enough branches to operate efficiently. Our research found that for Taiwan's banking industry to become competitive, the overall number of banks and branches must fall and the surviving institutions encouraged to expand their networks of branches. This challenge will be daunting for Taiwan's banks and regulators alike.
To determine the number of banks that Taiwan needs, we studied Taipei's banking system, which is both fragmented and branch heavy (Exhibit 1). After calculating the available banking revenue by studying the behavior of local businesses and residents, we concluded that Taipei can profitably sustain no more than 500 of its 850 branches and just 15 of the 50 institutions currently in operation.1 Such consolidation would substantially improve the industry's profitability while maintaining healthy levels of competition and customer service.
Banks aspiring to become leaders in the market should greatly expand their branch networks. By our estimate, a bank in Taipei needs around 100 branches to cover the affluent and mass-retail customer segments...