SAN FRANCISCO - The financial system on China's mainland is getting an infusion of Western-style management and investment capital - and so are Taiwan's banks, as the old guard at Chinatrust Financial Holding Co. Ltd. has discovered.
In the last two years a wave of young, U.S.-educated executives have populated the senior ranks at Chinatrust, which owns Taiwan's largest private-sector commercial bank as well as a $1.8 billion-asset California community bank.
While they try to strip it of its hierarchical ways of doing things, broaden its ownership beyond a handful of family members, and move to improve efficiency by consolidating processing and other functions, these young executives are sometimes clashing with convention.
At his first meetings as Chinatrust's new chief financial officer, Steven Cheng, a former Goldman Sachs Group Inc. investment banker, clung to a decade of experience working at U.S. and European firms. He challenged his seniors. He spoke loudly. He put forth his own ideas.
The shocked silence of other meeting attendees taught him an important lesson. "Confrontationally is not the style to do this," he said. "It's important to get your opinion across, but you don't have to shout."
The changes at the $29 billion-asset, family-run Chinatrust mirror those at New York banks in the 1940s and 1950s, when influential families like the Morgans ceded controlling stakes to outside shareholders.
And many U.S. community banks face the potential for such a transition today. In the American Bankers Association's latest survey of its community bank members, 34% of the respondents said they were family-owned organizations.
Those early meetings represented a cultural flash point for Mr. Cheng, who in his late 30's was enjoying an early retirement from Goldman Sachs until he took a senior position at his father-in-law's banking company. In doing so, he returned to the country he had left as a teenager.
And they were emblematic of the difficult transformation many Taiwanese banks are undergoing as they shed a family-dominated, Japanese-style structure (a legacy of the Japanese occupation from 1895 to 1945) in favor of a flatter organization owned mostly by outside shareholders.
"In the last two years we've changed the underlying thinking and management style," Mr. Cheng, now 40, said in an interview in San Francisco last month. For one thing, Chinatrust has adopted a "matrix and reporting line" structure. "That's American-style."
Led by chairman Jeffrey L.S. Koo, a Taiwanese businessman, Chinatrust has always been one of the island's pioneering banks. Six years after its founding in 1992, it went through a reengineering that instituted databases, new credit scoring, and Internet platforms. It was the first bank in Taiwan to open 24-hour service centers.
Mr. Koo has stepped back from many of the day-to-day duties. Though he is still the single-largest shareholder, with an 8% stake, he spends much of his time acting as an ambassador-at-large for the Taiwanese government, particularly in its dealings with mainland China.
His son, Jeffrey J.L. Koo Jr. (or "Junior," as he's known in the family), a slew of U.S.-educated senior managers, and Mr. Cheng - all representative of the new generation of Taiwanese bankers - currently run Chinatrust.
"Family-owned organizations can only grow to a certain scale. To get to the next stage, you need to get to professional management," Mr. Cheng said. "That's where we are."
Over the last two years they have focused on improving the efficiency of Chinatrust's growing branch network, doing things like consolidating processing and other functions after acquiring banks. Last year Chinatrust was Taiwan's most profitable bank, with a return on equity of 20%, up 4 percentage points from the previous year and the next most profitable bank's ratio.
And he counts as a coup the recent recruitment of a 20-member corporate banking team from Citibank, including its Taiwan country officer, Eric Chen. The poaching, which is not typical in Taiwan, brought Chinatrust professionals skilled in derivatives and other nonlending products, and a familiarity with both Western and local culture. At least 15 of the company's 28 senior managers have graduate degrees from U.S. universities.
Efficiencies, revenue synergies, and talent drives are the staff of life for many banks around the world. But for years Taiwanese banks have followed a model that makes loyalty and social standing a priority. Employment for life and respect from the community took precedence over quarterly returns.
The old-bank mentality has its plusses, Mr. Cheng says. For example, when Chinatrust started offering credit cards, it waded into uncharted territory and lost money on the product for five years. The gamble paid off, however, and it is now Taiwan's largest issuer of credit cards.
Such a gamble would not happen today, he said. "I think it would be very hard to get that through the management committee."
For instance, if the California subsidiary, Chinatrust Commercial Bank USA of Torrance, wanted to enter a business in which it would take five years to break even, the answer now would be "no way," Mr. Cheng said in an interview before speaking last month at the International Financial Institutions Association of California's annual conference in San Francisco. "For the opportunity cost of that investment, they should put the capital somewhere else."
The conference's locale was familiar territory for Mr. Cheng; he first came to the Bay Area as a junior high school student and he still has brothers and sisters here. After receiving a bachelor's degree in computer studies at Northwestern University and a graduate degree from University of Pennsylvania's Wharton School, he worked in capital markets and structured finance at Credit Suisse First Boston Corp., UBS AG, and Goldman.
His years on Wall Street have left him with the appearance and mannerisms of a New York investment banker: high-end clothing, confident charm, and verbalisms like "making the numbers."
Having spent more years in the United States than in Taiwan, he never thought he would return to his birthplace. But connections to Taiwan - namely Junior, a Wharton classmate, and his brother Angelo Koo, a college roommate - altered those plans. Mr. Cheng married a Koo sister, and then Junior asked him to come to Taiwan to work.
Experience among dealmakers should come in handy during the next several years. The Taiwanese banking industry is fragmented. Fifty banks control the deposit market, and the government has encouraged mergers.
In fact, last month the Financial Times reported that Chinatrust was considering taking over Sinopac, Taiwan's eighth-largest financial holding company. In September, it completed its $567 million acquisition of Grand Commercial Bank.
Some of Chinatrust's future growth is likely to occur in the United States; its subsidiary here has 19 branches in California, New Jersey, New York, Maryland, Texas, and Washington. Until 2001 it was known as China Trust Bank of California, but was not part of the Chinatrust organization; it was run as a separate company by Mr. Koo Sr. and another banker until Chinatrust bought it. For now, though, it is focused on integrating its parent's systems and expertise.
One of the advantage to Mr. Cheng's international background is knowing that many of the changes Chinatrust is making - from management organization to product specialties - have been tested at other banks, he said. "The road to the future is not unclear."
