Taiwan banks explore promise, peril of Southeast Asia

* Taiwan banks expand into SE Asia

* Ownership caps in some target country a challenge

* Profit from overseas contributions growing

* Banks struggle in crowded home market

By Faith Hung

TAIPEI, May 25 (Reuters) - Taiwan banks led by CTBC Financial and Fubon Financial are looking to step out of their comfort zone into newer markets in Southeast Asia, as the domestic economy slows and growth peaks for the $1.2 trillion-asset banking sector.

The expansion began in 2013 and is likely to accelerate over the next few years thanks to the new Taiwanese government's backing for companies to diversify away from China and venture into countries like the fast-growing Philippines.

Fatter margins and burgeoning middle classes are two of the prizes, although they come with risks such as tough foreign ownership restrictions and competition from established players like Singapore's DBS and ANZ of Australia.

"It's not easy to compete in Asia ... Southeast Asia governments place a 40 percent stake cap on what foreign banks can buy, and most financial institutions are family-controlled," Fubon Financial President Vivien Hsu told Reuters in an interview.

"The big challenges are how can you find a partner you can work with, and reach agreements in management and strategic directions," Hsu said in her first interview with foreign media since she took the position in 2013.

In just a few weeks, CTBC Financial Holding, parent of Taiwan's biggest credit card issuer, has announced two southbound deals, agreeing to buy a 35.6 pct stake in Thailand's LH Financial Group for $469 million and RBS's Malaysia unit for $189.7 million.

These come on top of a wave of acquisitions over the past three years.

Fubon bought a 48 percent stake in Hyundai Life Insurance for T$6.1 billion ($185 million). Bigger rival Cathay Financial Holdings purchased a 24.9 percent stake in Bank Mayapada and a 22.3 percent stake in the Philippines' Rizal Commercial Banking Corp (RCBC).

Canada-based Scotiabank's $1.7 billion stake in Thailand's Thanachart Bank could be the next target, with Morgan Stanley reaching out to potential bidders before an auction, according to banking sources.

Japanese, Taiwanese and Malaysian banks have been approached, the sources said, requesting anonymity because the matter was confidential.

CAREFUL WHAT YOU WISH FOR

On top of the foreign investment restrictions that prevent banks taking control of their investments, some analysts warn that hasty expansion into Southeast Asia could leave some Taiwanese banks stretched.

"We expect banks to ramp up their overseas expansion initiatives over the next two to three years," Standard and Poor's Taiwan ratings' credit analyst Eunice Fan said in a report published this week.

"But expansion into unfamiliar territories with often higher economic risk highlights the need for prudent capital management and adequate risk controls. Without such, banks could face constraints to maintain their capitalisation and overall credit profiles above the domestic average during expansion cycles."

Pretax earnings from Taiwan banks' overseas business have risen each year from 2008 to 2014, exceeding T$100 billion for the first time in 2014, according to the latest data from the Financial Supervisory Commission.

That made up 37.3 percent of their total earnings and surged 48 percent from 2013, it added. This contrasted with a mere 14 percent gain in domestic earnings.

Even so, the banks have already hit some headwinds in their journey south.

The Philippines' RCBC, in which Cathay Financial is one of the two biggest stakeholders, said earlier this month it had accepted the resignation of its president, even as it cleared the official of any wrongdoing in connection with a $81 million money laundering scandal.

"This is an isolated incident in the course of development. I don't' think it will affect our continuing investments in Southeast Asia," Cathay President C. K. Lee told Reuters.

ANZ's experience is another reminder of the difficulties. The only major Australian bank that expanded into Southeast Asia is now exiting non-profitable segments in the region to focus on its home market.

(Additonal reporting by Saeed Azhar and Swati Pandey; Editing by Lisa Jucca and Stephen Coates)