HONG KONG: Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) are eyeing a stake in Taiwan's Mega Financial Holding Ltd as they seek to enter the island market, Reuters quoted the Economic Daily as reporting from Beijing Friday.

The move would make the two giant lenders the first mainland banks to enter Taiwan. Shares in Mega Financial Holding surged to a three-week intraday high following the news.

The lenders will open their financial services to each other when the agreement takes effect, as early as March, the newspaper said.

Executives at BOC and ICBC visited Mega Financial during their visit to the island in November, it said.

Hong Kong representatives of ICBC were not available for immediate comment. Analysts at Daoheng Securities said the investment would provide little financial reward to the mainland banks, given the much-smaller size of Taiwan's market, but the investment would enlarge their network in the region.

A senior Mega Financial executive said his company hasn't ruled out the possibility of buying a stake in the mainland banks to help it tap into the huge mainland market, the newspaper said.

Standard and Poor's said Taiwan banks will likely target investment in Hong Kong lenders as the best route into the potentially lucrative mainland market.

Taiwan banks may opt to take a controlling stake in a Hong Kong bank in order to take advantage of the territory's Closer Economic Partnership Arrangement (CEPA), which lowers the entry barriers to the mainland, the credit rating firm said in a report.

Chung Huang, a credit analyst at Standard and Poor's, said that the ability to offer better services to mainland-based Taiwanese clients offers strong opportunities over the long term.

Banking analysts have said mainland banks have the healthiest financial condition, and good liquidity, amid the global financial turmoil that has made most banks vulnerable. They might go bargain hunting and target peers with good- quality assets that are badly in need of cash.

Taiwan-based Mega Financial is principally engaged in financial services through its eight subsidiaries. The company's products and services include banking, comprising deposits, loans, guarantees and foreign exchange.

It recorded nearly a 28 percent drop in net earnings for the third quarter last year.

Taiwan's economy will contract 11 percent this year, the worst recession among Asian economies, investment firm CLSA Asia-Pacific said in a report.

CLSA's estimate contrasted sharply with a Taiwanese- government forecast of a 2 percent growth rate for the island in 2009.

Reuters contributed to the story

(HK Edition 02/07/2009 page2)