Nevertheless, the consumer-finance companies portray themselves as wholesome purveyors of retail finance. One thing is certain: They are heroes of the stock market. Their share prices are on fire, up 21% in 2003 and 28% so far this year, compared with 6.4% for the broad TOPIX market index. Most of the investment is in the top four companies -- Takefuji, ACOM, Aiful, and Promise -- which collectively have some $54 billion in outstanding loans.
The reason the four are stellar performers: With interest rates near zero, they basically have a license to print yen. They can borrow money to fund their business at about 1%, then lend it at high rates to cash-strapped salarymen and housewives. Margins for the industry average about 25%, with scandal-tinged Takefuji expected to earn $636 million on $3.5 billion in revenues for the year ending this month. "The spread between their borrowing and lending is better than their global peers by a factor of three," notes James A. Doyle, a money manager with Causeway Capital Management LLC in Los Angeles, which owns shares of Takefuji, ACOM, and Promise.
Japanese investors tend to shun these stocks because of their image problems, but foreign investors can't get enough of them. They own 26.2% of Takefuji, 20.2% of ACOM, and 30.7% of Promise. Foreign banks are also interested. In January, 2003, Citigroup merged three companies -- AIC, DIC Finance, and Unimat Life -- into a new consumer-finance firm called CFJ. And last November, Britain's HSBC Holdings PLC said it wanted to launch a consumer-finance unit in Japan. No wonder. Although a crackdown by Japanese authorities a few years ago capped the rates charged at 29.2%, the industry is still flush with profits. "In the past 10 years, [they] have made more money than Japan's major banks," says Jason Rogers, a Barclays Capital Japan Ltd. analyst in Tokyo.DROP IN BANKRUPTCIES
Investor interest will only get stronger if the Japanese economy, which grew at an annual rate of 6.4% in the last quarter of 2003, continues to rebound. Last year, with consumers under enormous debt pressure, the big finance firms tightened their lending standards and trimmed loan books. But they now have reason to be more generous. On Mar. 15, the Japanese government reported a year-on-year 8.5% drop in personal bankruptcies, the third straight monthly decline.
What could ruin the party? For one thing, the decline in bankruptcies may be just a blip. On Feb. 23, Standard & Poor's lowered its rating on Takefuji, citing its former chairman's legal problems and noting that nonperforming loans still represent some 10% of its balance sheet. Moreover, Japan's banks are under great pressure to work out dud loans to small companies, whose employees tend to be heavy users of consumer finance. If big banks force the kind of belt-tightening that cuts wages and jobs, demand for retail loans could fall as default rates rise. "We are still very skeptical that there will be an overall decrease in personal bankruptcies" for the year, says S&P analyst Nana Otsuki.
Another potential problem: Megabanks are finally taking an interest in consumer finance. Bank of Tokyo-Mitsubish, UFJ Bank, and Sumitomo Mitsui Banking have all set up joint ventures recently. The consumer-finance execs aren't worried. As long as the Bank of Japan sticks to its zero-interest-rate policy, they intend to keep raking in the yen. By Brian Bremner in Tokyo