Japan's banking revival starts with a
cleanup By Richard Hanson
TOKYO - "Revival starts with a cleanup," said
post-World War II finance minister Juichi Tsushima on
August 17, 1945. And a convoluted cleanup in Japan's
banking business is what is under way today. This summer
of 2004 will be remembered as one of the hottest,
sweatiest and most important in Japanese banking
history.
As temperatures cool, bank customers big
and small will find that the banking system, under siege
since the early 1990s, is nearing the end of the most
sweeping restructuring since the late 1920s (before
banks were made a part of the Imperialist war, and
postwar, efforts).
There are, however, a couple
of snags.
The first one is just which bank will
emerge as No 1 in the new pecking order of banks. That,
fair or not, bestows some cost advantages on financial
markets, where ratings from Standard & Poor's,
Moody's or Fitch count.
First, a look at the new
battle for the banks. Keep in mind that there are only
four contenders: Mizuho Financial Group, Sumitomo Mitsui
Financial Group (SMFG), Mitsubishi Tokyo Financial Group
(MTFG) and the "sick man" of the group, UFJ Holdings.
But just as the new order seemed ready to emerge
this week, there was a bombshell. One of the expected
Big Three "mega-banks", the rogue Sumitomo Mitsui
Financial Group (SMFG), broke ranks and launched a -
highly unusual for Japan - hostile bid for UFJ Holdings.
That, in turn, threw a spanner into the works of the
already sealed agreement between UFJ Holdings and its
suitor, the well-endowed Mitsubishi Tokyo Financial
Group (MTFG).
That set off a US$29 billion
takeover battle that at the very least will shake up the
Japanese banking industry. In the emerging scenario, a
foreign entity, Sumitomo Mitsui Financial Group, could
end up being the largest bank in the world, measured in
the size of its assets. Otherwise, that honor will
almost certainly go to the UFJ and Mitsubishi Tokyo FG.
Right now, it is up in the air "The
merger of our group and UFJ would be the best choice for
the shareholders, customers, and employees of both
companies," Sumitomo Mitsui said in a statement. That
may be true, but it is also just one more uncertain step
into a union of banks that have conflicting corporate
cultures and checkered histories of earlier mergers.
An earlier round of mergers that joined the
Osaka-originated Sanwa Bank group and the Nagoya-based
former Tokai Bank created the targeted UFJ Holdings.
That merger was fraught with personnel and other
conflicts and troubles. That, to most observers, made
the match with Mitsubishi Tokyo a natural.
But
even that surprise announcement in July had already set
off a series of events and claims that are still being
examined by Japanese courts. This involves a challenge
by Sumitomo Trust & Banking Co (loosely a member of
the Sumitomo Mitsui FG), which had been negotiating with
UFJ Holdings to buy UFJ's trust banking unit. Sumitomo
Trust immediately filed a court case to block the
planned merger.
That may take several weeks to
resolve. The case is still winding its way up to a
hearing by the Supreme Court. That did not stop MTFG and
the UFJ Group, which on August 12 signed a "basic
agreement" to go forward. Last Friday, they established
an "integration committee" with a target for joining
hands in the autumn of 2005.
For UFJ, that came
just in the nick of time, considering the troubles that
it has partly resulting from an earlier merger, which
produced among other things three consecutive years of
losses. The 2001 merger joined the large Osaka-based,
retail-oriented Sanwa Bank with the somewhat weaker
financial group headed by Tokai Bank. Tokai is based in
the industrial region surrounding Nagoya, midway between
Tokyo and Osaka and dominated by Toyota Motor Corp,
Japan's largest corporation.
A bad match all
around The second part is how the banks and the
government finally tackled some sort of final resolution
to the banking industry's still-festering problem of bad
loans, symbolized by Daiei Inc.
According to
various accounts, the Sanwa group sought to dominate the
merger in what is described as a "purge" of senior Tokai
bankers. Sanwa has its own problems, with very large
customers with very large financial problems. The most
troubled company on its books is Daiei Inc, an Osaka
one-family-dominated retailer that once boasted Japan's
largest department-store and supermarket chain (while
dabbling in a baseball team, art and other unsuccessful
ventures).
These customers have run up huge
"non-performing" loans for UFJ and other very large
banks. UFJ has about 3.9 trillion yen (US$36.5 billion)
in bad loans on its books. (Daiei owes its banks more
than 1 trillion yen in interest-bearing loans.)
UFJ's financial problems were made all the worse
by troubles it ran into with the banking regulators
themselves, the Financial Service Agency (FSA), a
government body created in the late 1990s to oversee
financial markets and policy.
On the one hand,
two years ago in October 2002, UFJ found itself on the
bad side of Prime Minister Junichiro Koizumi's ambitious
minister for financial services and economy, Heizo
Takenaka. When Takenaka proposed sweeping changes in
bank-regulation standards that would force banks to
clean up their bad loans fast (also called
non-performing loans), UFJ led a bitter defiance
movement. There were serious personality clashes, too.
The upshot was a compromise, enabling less
strict enforcement of accounting rules. A key issue
involved what are called deferred tax assets (DTA) -
future tax rebates counted as prime capital. The
so-called DTA problem figured heavily in the collapse of
one regional bank and a huge government infusion of
capital in 2003 to the Resona group, which ranks as the
fifth-largest bank.
UFJ also ran afoul of the
FSA by cooking some of its books in reporting. Top
management was under fire from both its shareholders for
poor business performance. Making matters worse, it
appears that employees of the bank itself blew the
whistle on its questionable accounting practices. UFJ
was hit with administrative actions by the FSA.
Worries over an audit More worrying:
UFJ might also be hit by an unfavorable ruling by its
auditors come the closing of the accounts next month,
regarding its deferred tax assets. There is no
indication that this will happen, but some rating-agency
analysts do not rule out the possibility. That would be
one way of eliminating another bank.
The FSA is
applying pressure by considering follow-up inspections
of banks after special inspections timed for interim
book-closings on September 30 are finished, commissioner
Hirofumi Gomi said this week.
All of these
concerns were known before the Sumitomo Mitsui FG bid
for UFJ.
No matter what the outcome of the
merger battles, the UFJ merger with Mitsubishi Tokyo
Financial Group has not drawn rave reviews from
analysts. Commenting before this week's takeover
bombshell, Fitch Rating, the international rating
agency, declared that the merger has "mixed" credit
implications.
"In principle, Fitch welcomes
further consolidation of Japan's formerly fragmented
banking system," the agency said in a press release.
However, Fitch's senior director Reiko Toritani points
out, "We remain concerned that while the merger would be
good in principle, the implementation would be crucial.
Previous mergers in Japan, especially mergers of equals
have resulted in internal disputes, inefficient spending
of resources and difficulties in reducing costs." At
this juncture, UFJ is by all measures in need of a
strong merger partner.
It is also faced with the
Daiei problem. This week, UFJ Bank and two other main
creditors of Daiei decided to reject the retailer's plan
to revive itself without seeking assistance from the
Industrial Revitalization Corp of Japan (IRCJ), the
government-backed agency formed to rehabilitate
corporate basket cases. Daiei president Kunio Takagi is
reportedly intent on visiting senior officials of the
three creditor banks - UFJ Bank, Sumitomo Mitsui Banking
Corp and Mizuho Corporate Bank - within a few days to
seek their understanding concerning the plan. The banks
will discourage such actions and urge him to go for the
IRCJ to settle the issue by the end of the month.
For the banks, the IRCJ's involvement will
guarantee the transparency of the rehabilitation of the
supermarket chain and also make it easier for them to
negotiate the financial assistance they will provide to
Daiei. What that means is that there is less risk of
having to pump much more money into Daiei.
In
the rehabilitation plan Daiei presented to the banks on
Friday, Daiei asked them to forgive debts worth 390
billion yen in order to reduce its interest-bearing
loans, which exceeded 1 trillion yen as of the end of
February, to 250 billion yen by the end of next
February. The banks will urge Daiei to seek the IRCJ's
aid by proposing a compromise plan, including deferring
the selection of sponsors for its retailing section,
sources said.
Wal-Mart to the
rescue? Into this already crowded scene, a major
new player has emerged. Wal-Mart Stores Inc is prepared
to assist in rehabilitating the struggling retailer
Daiei Inc, even without the participation of the IRCJ,
according to media reports. Wal-Mart is the world's
largest retailer, and already has a stake in one of
Japan's larger retailers. The company has already
indicated to the IRCJ its willingness to help Daiei. But
it has also submitted to the beleaguered Japanese firm
an independent revitalization plan jointly crafted with
Goldman Sachs Group Inc.
Last Friday Daiei
presented to its main lending banks its own
rehabilitation plan centering on assistance from
Marubeni Corp, Tokyu Land Corp and Deutsche Securities
Ltd. All sides in this affair are pleading for what look
like their own best interests.
As part of
Daiei's independent rehabilitation effort, Goldman Sachs
selected Wal-Mart as a sponsor in a proposal backed by
investment funds and others. For bidding purposes, both
companies may assess Daiei's value at a high level,
thereby holding down the balance of the financial aid.
(Goldman Sachs, as an adviser and shareholder, will also
have a larger stake in a successful takeover of UFJ
Holding by Sumitomo Mitsui FG.)
All this may
appear to be a messy way to embark on a bank cleanup,
let alone the launch of a new era of "mega-banks" in a
country that has yet to sort out its current crop of
squabbling financial institutions.
(Copyright
2004 Asia Times Online Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication policies.)
