TAIPEI, Mar 13 (AP) -- An expected wave of acquisitions by foreign financial institutions could boost Taiwan's banking industry and help with its modernization, analysts say.

With many local banks saddled with overdue loans or high-risk assets partly because of excessive consumer lending, the Taiwan government has recently encouraged acquisitions or mergers with foreign banks.

London-based Standard Chartered PLC bought Hsinchu International Bank, a mid-sized bank for US$1.2 billion (€910 million) in September, one of the largest foreign acquisitions of a Taiwanese bank. It was also the biggest foreign direct investment in Taiwan in 2006.

Citigroup Inc. is also close to striking a deal to buy Bank of Overseas Chinese, another mid-sized local bank, for US$424 million (€323 million), according to Dow Jones Newswires, citing people close to the negotiations.

Citigroup officials declined comment on the report. An Overseas Chinese Bank spokesman Weng Chien has earlier confirmed it is in talks with a foreign bank about a deal but declined to identify the potential acquirer, citing a confidentiality agreement.

Foreign banks so far have a small presence in Taiwan, but the two high-profile cases could herald a wave of acquisitions by foreign banks to take advantage of the local banks' customer base -- mainly high-tech firms on the island and companies with manufacturing bases on the Chinese mainland.

"With the mergers, foreign banks can gain more Taiwanese investing on the mainland as their clients," Wu Chung-shu, an economist with the research organization Academic Sinica, said Monday.

Taiwanese banks are banned by their government from setting up branches in rival China so most Taiwanese investors there turn to foreign or Chinese banks for loans.

After the mergers, foreign financial companies can transfer Taiwanese managers to their Chinese operations to make use of their ties with Taiwanese investors and their shared language and culture with the Chinese, Wu said.

Despite lingering hostilities between Taiwan and China, Taiwanese have invested more than US$100 billion (€76 billion) in China.

Merrill Lynch analyst Sophia Cheng said the Standard Chartered deal and Citigroup's possible acquisition could increase pressure on other overseas banks, such as the HSBC Group, to accelerate their talks with Taiwanese banks.

Compared to local banks, foreign banks have stronger underwriting capability in wealth management and corporate banking products and could carve out a significant market share in these areas with their stronger international brand and product variety, Cheng said in a report.

The mergers are seen as good matches because Taiwanese banks are relatively cheap and because they need foreign know-hows to improve their performance, Wu said.

"Many Taiwanese banks are cheaper in value than their counterparts in Singapore, South Korea and China, offering foreign banks attractive deals," Wu said. "Because of the lack of know-how, local banks now act mostly as brokers for foreign financial firms in wealth management, cutting down their profit margins."

Wu said foreign banks could spur growth in Taiwan's banking and insurance business, which now makes up about 19 percent of the island's gross domestic product, compared to the manufacturing industry's nearly 30 percent.