Japan’s banks face hard slog

A soaring stock market and government pressure erode Japanese banks’ resistance to unwinding shareholdings in key corporate clients.

Tokyo - A soaring stock market and pressure from Prime Minister Shinzo Abe have eroded Japanese banks’ resistance to unwinding shareholdings in key corporate clients.

The largest lenders including Mitsubishi UFJ Financial Group pledged last month to sell as much as $15 billion of so-called cross-shareholdings, a long-awaited move that analysts say will benefit the banks and make companies more responsive to investors.

Now for the hard part. To achieve the targets, the lenders will have to discuss the plans with clients who have long relied on them as friendly shareholders to ensure financing, fend off takeover threats and keep more demanding investors at bay. While banks have been trimming their cross-shareholdings for years, past efforts were born of necessity and they were reluctant to cut stakes in the most important customers.

“It’s definitely a step in the right direction,” Kathy Matsui, vice chairman and chief Japan equity strategist at Goldman Sachs Group in Tokyo, said in an interview. “A lot of the easy unwind has already taken place and now we’re entering the more tricky conversations.”

Matsui said reducing the stakes would serve “true shareholders.” For the banks, selling shares after the Topix index doubled in the past three years would help them bolster capital ratios and boost profit that’s under pressure from slowing overseas credit growth and shrinking interest margins. They could also use the proceeds to buy back stock or invest in expansion.

Bank targets

Abe is urging companies to unwind the practice of owning shares in each other as part of his new corporate governance code. Introduced in June, the code calls on companies to disclose the rationale for holding shares for reasons other than pure investment.

Mitsubishi UFJ said on November 13 that it will cut its cross-shareholdings to 10 percent of Tier I capital over the next five years from about 19 percent now. Sumitomo Mitsui Financial Group said its stocks will drop to 14 percent of common equity Tier 1 capital from about 28 percent. Mizuho Financial Group set a target of a 40 percent cull.

Together, this means shares with a book value of about 1.9 trillion yen ($15 billion) could be on the market over the next five years or so, according to Shinichiro Nakamura, a senior analyst at SMBC Nikko Securities in Tokyo. The three banks held cross-shareholdings with a book value of 6.5 trillion yen at the end of September, Nakamura estimated in a November 16 note. Unrealized gains on these equities stood at 5.9 trillion yen, he said, about the same size as the economy of Lithuania.

The banks will achieve the targets, according to Hideaki Miyajima, a commerce professor at Waseda University in Tokyo who specialises in corporate governance. It was “groundbreaking” for the lenders to specify numerical goals because their stance wasn’t clear before then, he said in an interview.

The Financial Services Agency has been urging the lenders to pare the stakes to make them less vulnerable to stock-market movements. Selling shares will reduce the risk of fluctuations in the unrealized gains and losses component of capital, which banks record as equity prices rise and fall.

“Risks from equity volatility should be reduced,” Toshihide Endo, director general of the FSA’s supervisory bureau, said on November 16. “We encourage them to make steady progress in cutting such equities.”

The Topix climbed 0.9 percent to 1 588.61 at 2:24 p.m. in Tokyo on Monday, extending this year’s gain to 13 percent. Goldman Sachs analysts led by Matsui expect the index will advance to 1 800 over the next 12 months, according to a strategy report dated December 5.

After zaibatsu

Cross-shareholdings emerged in postwar Japan after the US-led occupation forced the breakup of “zaibatsu” conglomerates into separate companies, which then cemented alliances by purchasing shares in each other. Such holdings reached 51 percent of all stocks in Japan in about 1992, and had a market value of about 160 trillion yen, according to Kengo Nishiyama, a senior strategist at Nomura Holdings.

Lenders unwound much of their holdings during the nation’s banking crisis in the 1990s and early 2000s to comply with minimum global capital requirements and a new domestic law limiting stock ownership. The banks sold some of those shares to the Bank of Japan and a government entity set up to purchase the equities to avoid tanking the market.

The largest banks cut their holdings from a peak of 27 trillion yen in book value around 1999 to 13 trillion yen in March 2003 and then gradually down to 8 trillion yen in March 2010, Waseda’s Miyajima said. What’s left is stakes in companies that the lenders have the deepest relationships with.

Long way

Early signs show that banks are having some success in their discussions with clients.

“We’ve started negotiating with the customers that don’t meet the criteria and, of course, there aren’t that many that just say ‘Okay, go ahead and sell them,”’ Japanese Bankers Association Chairman Yasuhiro Sato said on November 19. “But customers have to submit their own stance on governance, and their awareness of this has come a very long way.”

As a result, “almost no” clients have threatened to take their business elsewhere, said Sato, who is also chief executive officer of Mizuho.

Mitsubishi UFJ’s main banking unit has stakes in more than 800 companies ranging from Toyota Motor Corp., Japan’s most valuable company, to Amita Holdings, a Kyoto-based waste recycling business, according to data compiled by Bloomberg.

Shizuoka Bank is one company that has indicated a willingness to allow a large shareholder to trim its stake. The regional lender’s CEO Katsunori Nakanishi said in an interview last month that a 20 percent to 30 percent reduction in cross-shareholdings with Mitsubishi UFJ would be appropriate. Japan’s biggest lender owned 3.59 percent of Shizuoka Bank as of September, as part of a relationship that allowed the smaller firm to gain from its expertise and technology, Nakanishi said.

Internal resistance

Still, Miyajima said banks may face resistance from within. While one camp is aware of the regulatory pressure to reduce the holdings and wants to sell them while prices are still high, the other side worries about alarming clients, he said. One concern for companies is the risk that selling pressure may push their share prices down.

“Saying that selling cross-shareholdings is a negative that leads to share prices falling is taking a short-term view,’’ said Matsui. “If you take a medium to long-term view, it simply isn’t negative. Governance will be stronger and the interests of true shareholders will be protected.’’

-With assistance from Miho Yamada.

BLOOMBERG