Cheap takeover faces troubled Japanese
bank By Richard Hanson
TOKYO
- Late in 1933, during a severe banking crisis, three
local Osaka financial institutions joined forces to
create a "people's" Sanwa Bank, whose written characters
mean "three harmonies" - with a three-leaf green clover
symbol. This week its luck ran out.
Under its
latest name, UFJ Holdings Inc, now Japan's
fourth-largest bank, surprised just about everyone by
seeking to be taken over by a larger rival, Mitsubishi
Tokyo Financial Group Inc (MTFG). On the face of it,
such a match could create the largest bank in the world
measured in combined assets. Reports suggested a basic
agreement might be announced on Friday.
What is
likely to emerge from this agreement to be taken over is
a blueprint that will compel UFJ to use its remaining
capital to write off the large amounts of outstanding
bad loans, some of which have been on its books for more
than a decade. According to one source close to the
regulators, this will reduce the cost to MTFG.
"It will be a cheap takeover," the source
observed. That means the amount of capital to purchase
shrinks.
Moreover, UFJ's larger domestic retail
business can fill some important gaps in MTFG's domestic
business, especially in the western parts of the main
island of Honshu, such as the industrial region around
Nagoya and the commercial hub of Osaka. MTFG is itself
the product of an early merger in 1996, of Mitsubishi
Bank (the financial pillar of the Mitsubishi Group) and
the Bank of Tokyo (once Japan's designated
foreign-exchange specialist).
The public
relations boast would be creation of the world's largest
banking group in terms of assets. On paper, Mitsubishi
Tokyo and UFJ have 140 trillion yen (US$1.2 trillion)
Mizuho Financial Group and 100 trillion yen at Sumitomo
Mitsui Financial Group. In any case the Big Four will
become the Big Three. (The US-based Citicorp now is
considered the largest in the world. It is also far more
profitable.)
In the case of UFJ the question
profitability is overshadowed by the more stark prospect
of survivability. The bank's relations with the
Financial Services Agency (FSA), which regulates
financial institutions and markets, have been rocky.
Probes turned up UFJ regulatory
problems FSA investigations last autumn turned up
problems. UFJ Holdings was ordered to make much larger
provisions for bad loans than it earlier had
anticipated. The move was prompted by the discovery that
UFJ's bad loans were much higher than it had said. This
is a delicate area. UFJ is exposed to a number of large
companies that are deeply in debt.
Things got
worse. At the end of March, UFJ's bad-loan (to good
loan) ratio was 8.5%. That is about twice as high as
other banks. MTFG's ratio is less than 3%. UFJ is also still
holding large loans from the government, extended during
a bank crisis in which Japan actually nationalized some
banks. UFJ would have to cut its bad loans sharply to
meet FSA goals, which were set by Economy Minister Heizo
Takenaka.
In the meantime, UFJ reported losses
for three years in a row. In the fiscal year ended March
2004, the FSA ordered the bank to increase its loan loss
capital reserves. The result was a consolidated net loss
of about 400 billion yen.
Senior management
heads rolled. The FSA has pressured the bank on other
issues as well involving how the bank is run. Last
month, the FSA ordered what are called "administrative
business improvements".
As part of efforts to
revive its finances, UFJ has set itself a goal of
reducing its bad-loans ratio by half. The bank aims to
do this mainly by helping its large borrowers return to
profitability during the first half of fiscal 2004
(ending September). It is reported, however, that there
were doubts inside the bank that this could be achieved.
There are also reports of allegations that UFJ
tried to conceal from the FSA the financial condition of
a debtor, an act that carries possible criminal action.
A takeover by Mitsubishi Tokyo might clear the air over
just what kind debt problems exist.
On the one
hand, UFJ might be able to expedite efforts to help some
of its large debt-ridden customers. The most frequently
named companies are a trading company named Sojitz Corp,
the big supermarket operator Daiei Inc and condominium
builder Daikyo Inc. On the other hand, there are no
details provided anywhere about the outstanding debts
linked to others, including people who may be involved
in illegal activities.
Concerns about
criminal liability That too is a problem in
bailing UFJ out of trouble and putting it on track for a
takeover. As one Japanese newspaper put it: "Lingering
concerns over whether UFJ will be held criminally
accountable have hindered its efforts to raise
additional funds to substantially reduce its bad loans."
As the story began to slip out on Wednesday,
other complications became apparent. Among them, UFJ
abruptly called off plans that were being discussed to
merge its trust division, UFJ Trust Bank, with Sumitomo
Trust & Banking this year.
That could cause
complications. Sumitomo Trust & Banking Co has said
it considering filing a lawsuit against UFJ. The deal
was to sell UFJ Trust Bank to Sumitomo Trust for about
300 billion yen, with a signing expected next Thursday,
July 22.
If all goes well, UFJ is planning a "comprehensive
integration" with MTFG, including the groups' two trust
banking units - Mitsubishi Trust and Banking Corp and
UFJ Trust Bank. A top official of Mitsubishi Tokyo
Financial Group said his group would consider any merger
proposal from UFJ "in a positive
light".
If a new holding company is
created, there would be four banks belonging to the two
groups, according to one report: Bank of
Tokyo-Mitsubishi, Mitsubishi Trust and Banking Corp, UFJ
Bank, and UFJ Trust Bank.
There is considerable
speculation over other possibilities of a takeover by
MTFG. Among them is whether Mitsubishi would get more
favorable consideration for government-linked financing
for the Mitsubishi Group's troubled Mitsubishi Motors
Corp, which will require a larger infusion of capital to
make up for the withdrawal of DaimlerChrysler.
That may be far-fetched. The Mitsubishi Group
has said it will back its group-mate. As for the fate of
the old Sanwa Bank in the takeover? "UFJ is certainly
the loser - they will be the only one left behind," said
one source. The luck of the green clover is over.
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