First Bank, the main unit in Taiwan's First Financial Group, has an ambitious target of raising spreads on its investments as much as 10 basis points more than what its treasury operations currently yield, says Jeson Liu, executive vice president. Key to this will be expanding its exposure in non-New Taiwan dollar securities and structured products.

The bank is also keen to offer more sophisticated structured products to its clients, but as a first step must invest in these with its own assets, Liu explains.

Liu, a banker with 20 years of experience at both local and international institutions, came aboard last year in order to bring First Bank's capital market operations up to international standards, and to take aim at cross-town rival Chinatrust Commercial Bank, considered by many to be the island's most sophisticated bank.

He can boast a new, hi-tech trading floor (at the 20th floor, Taiwan's "highest trading floor", jokes one staffer) but one not fully staffed. One of Liu's biggest tasks this year will be recruitment to fill out the floor. But other banks are also keen to expand, and the talent pool is thin.

First Bank's assets from depositors total NT$1.2 trillion ($37.7 billion), of which NT$850 billion ($26.7 billion) are in loan portfolios and the other NT$350 billion ($11 billion) is in securities. With an improving economy, rising interest rates and tightening spreads, the bank is adjusting its treasury management to boost returns, reduce risk and create lucrative cross-currency products that it can sell to customers.

First, it is starting to increase its loan portfolio. In the past, up to 80% of total assets have been loaned out, but economic doldrums and political uncertainty prompted the bank to retreat to its present posture, with only about 70% of its assets in loans. The economy has improved since late last year and Liu intends to put at least 75% of assets back into lending.

While the fixed-rate securities portion is set to reduce, Liu wants to make this portfolio more sophisticated, in order to reduce total risk, improve returns and to pave the way for new products. Currently, the bank puts up to 80% of its security assets in central bank deposits. Derivative structured products account for 3-5% and domestic equities, which can go as high as 20% of the securities portfolio, are now in the 4-5% range. The remainder is in government and corporate bonds. Less than 1% is in non-NT$ securities.

One big change expected for this year is to increase the international securities portion to as much as 5% of that portfolio. "We need to get involved in more complicated structures that we can then provide to retail investors," Liu says. The bank wants to diversify into cross-currency swaps for exposure to US Treasury bonds, UK Gilts and Australian government bonds. Initially, First Bank will have to work with global banks for such access, although it intends to develop this expertise in-house.

But this is also intended to raise the bank's average yield. The bank's total portfolio average spread against average funding cost (the 2.45% 10-year Taiwan government bond) is around 45bps, and Liu wants to increase this by 5-10bps in 2005. Domestic interest rates have already gone up 12.5bps recently and Liu thinks they could rise another 50bps this year, all posing risks to the bank's fixed-rate securities.

Fortunately these comprise only about a fifth of the bank's bond portfolio, but Liu remains keen to find more floating-rate securities, or swap into floating rates.

The advent of the financial holding companies law has made this transformation possible. It has prompted the bank to establish state-of-the-art platforms for dealing and risk management. The bank is in the process of building a dedicated group for structured products. And with its newfound ability to understand the risks in its portfolio, Liu and his team realize the need to diversify, both to enhance returns and to reduce dangerous exposures.

Liu says that, if the right recruits are hired, the bank may consider investing a small amount in international equities, but this is not an immediate priority.

The holding company also intends to seat the investment team of non-life insurance affiliate Mingtai Insurance on the same floor, and may eventually commingle the investments. Mingtai had $407 million of assets as of end-2003. The country's fourth-largest fund management company, National Investment Trust Company, is also a member of the group.