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Mega Financial to delay expansion ambitions as money laundering scandal continues to simmer

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Mega Financial to delay expansion ambitions as money laundering scandal continues to simmer

Any opinions expressed inthis piece are those of the author and do not represent the views of S&PGlobal Market Intelligence.

Withits banking unit still reeling from a money laundering scandal that has claimedvictims among management ranks, Mega Financial Holdings Co. Ltd. will likely slow downits overseas expansion plans.

Atthe beginning of 2016, the fourth-largest Taiwanese bank by assets as of June30 had prepared a war chest of around NT$200 billion to conduct overseasM&A and was waiting for the government's "go" signal, accordingto Mckinney Tsai, then-chairman of Mega Financial, as reported by Liberty TimesNet in February.

Butthings changed in August when MegaInternational Commercial Bank Co. Ltd. was US$180 million, the highest everfor a Taiwanese bank, for lax compliance with U.S. anti-money laundering laws.U.S. regulators uncovered a number of suspicious transactions between thebank's New York and Panama branches.

In the aftermath of the scandal, Taiwanese President Tsai Ing-wen said the incident has hurtthe island's reputation and created mistrust of its financial sector.Additionally, current Mega Financial Chairman Michael Chang the company may considerstreamlining or closing branches in jurisdictions that are considered high risk.

"MegaFinancial was originally looking for opportunities in Southeast Asia … Afterthis incident it will be more conservative in the overseas business," saidEva Chou, a banking analyst with Taiwan Ratings, the local affiliate of S&PGlobal Ratings.

Thestate-run Taiwanese bank had been actively pursuing M&A and establishingoverseas subsidiaries, as part of the government's push for financial companiesto "go south" into Southeast Asia, she said.

Bankson the island have looked at potential consolidation in the domestic bankingindustry and overseas expansion as ways to gain scale and better compete in theregion.

Butlarge-scale M&A is now unlikely, as the bank will need to focus onimproving its internal management and will be very cautious in legal complianceissues abroad, Chou said.

Thefallout of the scandal has not abated just yet. Heads rolled at Mega Financialimmediately after the scandal came to light. Chairman Shiu Kuang-si in the wake of theincident after taking the helm for only 15 days. Wei Mei Yu, a former presidentof the banking unit, also resigned from all her positions at the bank.

Additionally,Mckinney Tsai, who resigned as chairman in March, is now facing charges offinancial irregularities, breach of trust, forgery and other related offenses,the Taipei Times reported Oct. 5.

Asthe incident escalated, government officials have also come under fire. DingKung-wha, chairman of the Financial Supervisory Commission, has amid criticism ofthe regulator. Finance Minister Sheu Yu-jer and former Finance Minister ChangSheng-ford will be investigated to determine whether they should bear anyresponsibility for the disgrace.

Whilethe bank is being probed by a task force led by the Taiwanese cabinet, the dusthas not settled for its U.S. operations. President Bruce Yang said this weekthat its Chicago branch also has not met required compliance controls, althoughno public enforcement action has been taken so far.

Theincident's impact on Mega Financial's operations and earnings may take moretime to surface, which explains the company's "adequate" financialposition, even though it is quite strong from a rating perspective, Chou said.

S&P Global Ratingsand S&P Global Market Intelligence are owned by S&P Global Inc.

As of Oct. 4, US$1 wasequivalent to NT$31.42.