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Japan's Shinsei Midsize Bank, Supersize Ambitions


The returns bring the word "supersize" to mind. Shinsei Bank Ltd., the lender sold at a government auction to Western investors for $1.2 billion in 2000, has delivered $3.7 billion in profits to its buyers. But while the bank's primary backers -- Ripplewood Holdings, GE Capital (GE), and Mellon Bank (MEL) -- have been doing high-fives over their windfall from two separate share offerings, those who have since bought into Shinsei are more likely to be shaking their fists. Since hitting a post-IPO high of $8.20 per share a year ago, the stock has fallen by 38%.

It's Thierry Port?'s job to make sure all shareholders -- not just the gaijin giants who rescued the bank -- profit from Shinsei. Port?, who ran Morgan Stanley's (MWD) Japan operation for eight years, joined Shinsei as vice-chairman in late 2003. On June 24 he is to be tapped as the bank's president. "Obviously, I'm not happy about the stock," says Port?, who says he aims to do a better job at selling Shinsei's growth story.

That story boils down to this: Shinsei has cleaned up its loan books, cutting its dud loans to $479 million as of Mar. 31 from $17.2 billion in 2000. Sure, net income rose just 1.6% last fiscal year, to $624 million, but Shinsei had enough capital to fund two critical acquisitions. In September, Shinsei paid $601 million to trump HSBC Holdings PLC (HBC) in the chase for consumer finance giant APLUS Co. Then in January it forked over $648 million for Showa Leasing, which provides construction and office equipment to some 40,000 corporate customers.

Both deals are crucial to Shinsei's broader strategy of diversifying the bank's earnings beyond the low-margin corporate lending that had been its focus. As a result, non-interest income last year accounted for about 63% of Shinsei's $1.7 billion in revenues. Now, Port? wants to make Shinsei -- with some $59 billion in assets -- strong enough in investment banking, retail banking, and consumer finance to punch above its weight class against the likes of Mizuho Financial Group Inc. and Mitsubishi Tokyo Financial Group Inc. (MTF), with $1 trillion-plus in assets. "Shinsei is fleet of foot and innovative," insists Timothy Collins, Ripplewood's founder and CEO.

WARY INVESTORS

But it's not just high-ticket deals that are holding back the stock. Nearly 30% of Shinsei's shares are still held by Ripplewood and a handful of other early investors. Potential buyers fear that those folks may unload piles of shares to lock in profits. Another worry: Shinsei's giant rivals have cleaned up their loan books, too -- and they're rolling in profits and targeting many of the same markets. While Shinsei's 29 branches are mighty cool -- many boast Starbucks (SBUX) coffee shops -- its key retail-banking rivals have 400 or more outlets. There are also concerns about whether a middling player such as Shinsei can smoothly absorb Showa and APLUS. "They have quite a bit of digesting to do, and that raises issues about earnings sustainability," says Barclays Capital Japan Ltd. analyst Jason Rogers. Already, Shinsei is saying profits will decline 6.5% for the year ending next March because of accounting charges related to the deals.

If Porté is worried, he's not showing it. He says Shinsei can prosper because of its expertise in asset securitization for big Japanese corporate clients, hedge funds for wealthy investors, and innovative offerings such as "PowerSmart" housing loans, which let borrowers pay down mortgages early without big fees.

Porté says he jumped ship from Morgan because Shinsei is "a Japanese financial institution with a difference." Perhaps, but with Shinsei holding the title of Japan's worst-performing bank stock this year, it may not be the kind of difference he had in mind.

By Brian Bremner in Tokyo


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