Daiwa sets future as regional player

A tieup would focus Daiwa on Kansai, Japan's second-biggest region and an industrial hub

By CNN's Alex Frew McMillan in Hong Kong

OSAKA, Japan (CNN) -- Daiwa Bank is in talks to create a super-regional Japanese bank.

The step would pin the troubled bank's future on serving a more local audience, specializing in retail and small-business banking.

Osaka-based Daiwa is discussing hooking up with Kinki Osaka Bank and Nara Bank in a holding company, a spokesman confirmed Thursday.

Daiwa is typically seen as the weakest of Japan's big banks, or "city" banks. That has led to heavy speculation over the last two years that it is close to collapse.

It has $6.5 billion (814 billion yen) in bad loans, or around 7 percent of its total.

Speculation of collapse

There has been talk of a merger with a bigger bank like Sumitomo Trust, or even of nationalizing Daiwa.

COUNTRY PROFILE At a glance: Japan Provided by CountryWatch.com    CNN.com Asia More news from our Asia edition

A hookup with Kinki Osaka and Nara would move it away from competing with Japan's Big Four bank groups. Instead, it would concentrate on being a strong regional player.

Daiwa is a nationwide bank that specializes in lending to small businesses. The other two banks are regionals based in the cities of Osaka and Nara.

The super-regional would have a strong presence in Japan's Kansai region. The western region is Japan's second-biggest population base, home to the cities of Osaka, Kyoto and Kobe.

Kansai suffering in slump

Kansai is also an important industrial hub. But it has suffered in Japan's decade-long economic slump. Officials admit Japan is again in recession, which has hurt manufacturers there.

That has also damaged the banks serving the area. Daiwa is the region's biggest city bank and lost $188 million (23.5 billion yen) last fiscal year. Kinki Osaka is Kansai's biggest regional bank.

The three banks have been talking about firming up their relationship for two years, Daiwa spokesman Kiyoshi Nakagawa said.

They already own stock in each other and have a "close relationship," he said. For instance, Daiwa owns 24 percent of Kinki Osaka.

Trimming costs

A tieup under a common parent company would help the banks trim costs. The Yomiuri Shimbun newspaper said the merged bank would close around 100 branches and cut 1,800 jobs.

Daiwa denied the newspaper's claim that the three banks had agreed to set up the parent this year and would combine operations by 2003.

The three banks would have assets of around $160 billion (20 trillion yen), still much smaller than Japan's Big Four groups.

Many see the huge amount of bad loans with Japan's banks as the country's biggest business problem, holding back its recovery.