Consolidation in Taiwan's local banking sector is essential for the survival of local banks in an environment where interest rate spreads are falling below one percent, a prominent local banker said Friday. Victor Kung, president of Fubon Financial Holding Co., Taiwan's second-largest publicly traded financial holding company, said local banks will only be able to operate profitably in the future if they merge with their counterparts. At present, fierce competition among local banks and the low interest rate environment are narrowing profits and present major obstacles to future development, Kung said in a speech at a seminar organized by Taipei-based Shih Chien University and the Taiwan Academy of Banking and Finance. Narrowing interest spreads -- the difference between the rates at which banks lend and the rates they pay on deposits -- have particularly squeezed bank profits since the financial crisis in late 2008. The excessive fragmentation of Taiwan's banking sector has also limited profit potential, Kung said. Though the top five banks account for market shares of more than 80 percent in Singapore and South Korea respectively, the top five banks in Taiwan have a relatively small 43 percent share of the local market, he said. 'No one can earn enough to thrive unless they can expand their scale of operations through mergers to ease competition, ' Kung argued. Because state-controlled banks control half of Taiwan's market, Kung said they must play an important role in the sector's consolidation and should move toward privatization and mergers as part of a financial reform campaign. While the Fubon Financial president advocated the approach, he acknowledged the process would be challenging because of the difference in corporate cultures between private and state-owned banks. Fubon engineered such a union in 2005 when it formally merged its Fubon Commercial Bank with the publicly-owned Taipei Bank, which it acquired in 2002. 