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Two big banks regroup
TOKYO, Japan (Reuters) -- Two of Japan's major banking groups took steps to beef up their finances on Wednesday in the latest sign that banks are feeling the pressure from a government drive to clean up the financial system's bad loan mess. Sumitomo Mitsui Financial Group said it would merge two banking units and use the proceeds to erase huge latent losses stemming from Japan's weak stock market. Separately, UFJ Holdings, the smallest of Japan's four megabanks, said it planned to raise 100 billion yen ($830.6 million) in capital from U.S. investment bank Merrill Lynch in a bid to boost its weak finances. The moves underline the stark choices banks face as the government pushes them to resolve their bad-loan problems and repair fragile capital, which has been battered by falling share prices and the rising cost of cleaning up their dud assets. The government plans to reassess banks' lending to large, troubled borrowers early next year and look into the health of their capital, possibly paving the way for injecting public funds into a banks found to be undercapitalized. Raising two trillion yenSumitomo Mitsui Financial Group (SMFG), the nation's second-largest bank group, said it expects to raise an accounting surplus of about two trillion yen ($16.61 billion) through the merger of Sumitomo Mitsui Banking, the group's core commercial bank unit, and its second-tier regional banking subsidiary, Wakashio Bank. The two banks plan to use the profit to erase their unrealized security losses and strengthen their financial base, SMFG said, adding that the merger would also help it tap into Wakashio's string relationship with small businesses. Wakashio Bank, with operations in the Tokyo metropolitan area, will be the surviving entity, although the merged bank will retain the name of Sumitomo Mitsui Banking. "There is an accounting benefit because unrealized securities losses were the biggest risk factor for the bank," said Hironari Nozaki, bank analyst at HSBC Securities. "It may be positive for its shares, but there is no economic merit." Stemming heavy lossesAn analyst at a securities firm said the move appeared to be aimed at preventing the bank from posting heavy losses in its earnings for the fiscal year ending in March that could further erode its capital. SMFG suggested the recent sell-off in bank shares had been a factor behind the merger plan. "We didn't realize share prices would fall this much...and particularly over the past few weeks," Masayuki Oku, the group's senior managing director, told a news conference. "We didn't feel we would have to come this far (merger), but we came to this decision earlier in the month." Banks taking a beatingBank shares have taken a beating since Heizo Takenaka took office as the top banking regulator at the end of September and unveiled tougher guidelines for assessing banks' capital and loan provisions late last month. Analysts said UFJ's move appeared to have more substance. "UFJ looks different. They are tying up with a foreign firm to tap foreign know-how on the disposal of bad loans. I think the market should approve of such a move," said Hiroshi Ariga, deputy general manager at Norinchukin Zenkyoren Asset Management. UFJ said it plans to raise the new capital through the issuance to Merrill of preferred securities for a new UFJ Bank subsidiary that from March will take over some one trillion yen in problem loans to small businesses. UFJ said that the capital increase would slightly boost the group's capital adequacy ratio - a key measure of financial health - and would help it cut the ratio of problem loans to total loans to about three percent by March 2005, down sharply from 10.4 percent at the end of September. A closer relationshipFor Merrill, the deal could lead to further business relationships with the UFJ group, and could also be profitable if the scheme helps to revive companies, analysts said. "With an outside investor, there could be better governance over the scheme, which could get its hands on bad loans the bank itself couldn't have," said Nozaki. Investor confidence in UFJ has plunged since the government began setting out its new, tougher stance on bad loans earlier this year, with markets worried that the bank's record of bailing out large, troubled borrowers made it the most vulnerable of Japan's major banks. To cut its exposure to the volatile stock market, UFJ also said it would speed up the unwinding of cross-shareholdings. The group also said it will reallocate about one fifth of some 5,000 administrative officials to positions ranging from marketing and sales to lending, aiming to strengthen the group's profitability by focusing resources on core business operations. "Amid criticism of banks, we thought it was important to provide a clear direction in the group strategy," said UFJ Holdings President Takeshi Sugihara. "We have a strong resolve to achieve these reforms."
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