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JULY 26, 2004
A Winning Team Of Japanese Banks Combining giants MTFG and UFJ would amplify their strengths -- and lure investors One bank is the financial cornerstone of the sprawling Mitsubishi keiretsu, boasts the strongest balance sheet of Japan's four mega-banking groups, and earned a record $5.1 billion in the fiscal year ended in March. The other is under scrutiny for understating nonperforming loans and lost $3.6 billion in the same period. So why would mighty Mitsubishi Tokyo Financial Group Inc. (MTFG) even consider cohabiting with the likes of UFJ Holdings Inc., a banking group with $36 billion in dud loans? Turns out MTFG President and CEO Nobuo Kuroyanagi and his colleagues think there are plenty of good reasons, and on June 14 Kuroyanagi told reporters in Tokyo that merger talks were under way. The new bank would have $1.7 trillion in assets, eclipsing Citigroup (C ) as the world's No. 1 in assets, and would boast a market capitalization of $80 billion. Analyst Ned Akov of ING Financial Markets LLC says this number could jump to more than $100 billion in a year or so, thanks to cost savings. "It would combine MTFG's solid balance sheet with UFJ's strength in the consumer and small- and medium-company loan segments," he says. The two banks are hoping to merge by December. The deal is also likely to stoke further global investor interest in Japanese banks, once considered pariahs. Among major banks, nonperforming loans have been halved since 2002, to $124 billion as of March, or about 5.2% of total bank loans. Foreign investors now own 20% or more of MTFG, UFJ, and their two major rivals, the Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group. Kuroyanagi, a 39-year veteran of Mitsubishi bank who took over in April, has already done considerable house-cleaning. MTFG has cut back its portfolio of nonperforming loans to $13 billion, or about 3% of outstanding loans, vs. 8.5% at UFJ. Kuroyanagi is expected to demand that UFJ President Ryosuke Tamakoshi pare down his problem loans in a similar drastic manner. UFJ's major borrowers include debt-laden retailer Daiei Inc. (DAIEY ) and developer Daikyo Inc. Since UFJ doesn't have a viable future as a stand-alone banking group, MTFG "will have the upper hand," says Jason Rogers, a credit analyst at Barclays Capital Inc. (BCS ) in Tokyo. ASSETS IN TRUST MTFG has already scored one victory. Tamakoshi and his board have agreed to abandon their plans to sell UFJ Trust Bank Ltd. to Sumitomo Trust & Banking Co. Trust banks offer lucrative asset-management services for wealthy individuals and also manage pensions for big institutional clients. Now, Mitsubishi's trust business, already No. 1, will get a huge boost from UFJ. Kuroyanagi's other ambition is to more than double the income from retail banking, to 25% of total earnings. That means generating a lot more fees from the sale of mutual funds and home mortgages. Here again, the amalgamation has a certain logic. UFJ merged with Sanwa Bank Ltd., one of the strongest retail banks in Japan, back in 2002. The bank also brings to the party plenty of small-business clients, a field where MTFG lags, plus blue-chip borrowers such as Toyota Motor Corp. (TM ) and its legion of affiliated suppliers. The trick, of course, is smoothly executing a merger of this scale -- and Japanese banks have a dreadful track record there. In early 2003, for instance, the automated teller network at the newly merged banks that formed Mizuho went haywire for three days because of compatibility problems. "One of the most pressing tasks will be how to integrate their info-tech systems," says Neil Katkov, an analyst at research firm Celent Communications LLC in Tokyo. Still, both banking groups have been through this before, and with the economy on the mend, earnings momentum should ease the transition. MTFG and UFJ may look like an odd fit now, but with any luck there could be the makings of a blissful union down the road.  By Brian Bremner in Tokyo Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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