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With fewer subprime worries, they're in buying mode. First, Mizuho's big Merrill buy-in; now, Sumitomo Mitsui's reported stake in Barclays
A feature of the subprime-fueled financial crisis that has engulfed many of world's banks in recent months has been the stability of Japan's banks. Unlike Western rivals, Japan's banks have posted relatively small subprime-related losses, prompting some skeptics to suggest the Japanese were repeating the sins of the 1990s and hiding losses (BusinessWeek.com, 2/21/08).
Yet rather than sitting on hidden losses, Japan's banks—shielded from the worst of the subprime blowout by conservative lending strategies and painful memories from the '90s—are emerging as rivals to sovereign wealth funds in bailing out troubled Western rivals. According to June 20 reports in Japan's Nikkei newspaper, the country's leading business daily, Sumitomo Mitsui Financial Group (8316.T), one of Japan's three "megabanks," is to invest $927 million in Barclays (BARC.L), the third-biggest bank in Britain, in return for "several percent" of the British bank's stock through a private placement of new shares. The Nikkei says Barclays will also receive cash from Middle Eastern and Asian sovereign wealth funds, and that Barclays and Sumitomo Mitsui will deepen cooperation between their Asian operations.
Analysts broadly welcome such a move. "Assuming the report is correct, we see the news as positive. While the capital stake is not all that large, we think SMFG could easily see synergies with Barclays' core banking business," JPMorgan (JPM) analyst Katsuhito Sasajima wrote in a note to clients. In Tokyo trading, Sumitomo Mitsui's stock price slipped 1.4% on the news—roughly in line with the Nikkei 225 benchmark index's drop on the day. The bank has made no comment on the reports.
More Overseas Deals Could Follow
Sumitomo Mitsui's move looks to be part of a trend. It follows a similar deal by a unit of Mizuho Financial Group (MFG), Japan's second-largest bank by assets, in January. At the time, Mizuho Corporate Bank took a $1.2 billion stake in Merrill Lynch (MER) after the U.S. financial group issued $6.6 billion of preferred stock. Hironari Nozaki, a bank analyst at Nikko Citigroup in Tokyo, thinks more overseas deals could follow. After a meeting with Mitsubishi UFJ Financial Group (MTU), Nozaki thinks Japan's largest banking group could also be lining up foreign acquisitions. "We got the impression from our meeting that the bank is targeting the U.S., looking for a commercial bank rather than an investment bank, and thinking about something smaller than Union Bank of California, its U.S. subsidiary," he wrote to clients. Following the June 20 development he added: "It is looking as if it is still early in the game for these kinds of moves."
In the meantime, Sumitomo Mitsui's deal looks like a smart move for both parties. The British bank has booked just over $5 billion in subprime losses and has been seeking to increase its capital case by about $8 billion. By forming a capital alliance with the Japanese bank, it gets some of the funding it needs and the possibility of closer ties with a large Japanese bank.
From Sumitomo Mitsui's side of the deal, it's unlikely to be overpaying for Barclays stock. Its share price is at its lowest level since November, 1998. What's more, the Japanese bank may see parallels with a deal it did with Goldman Sachs (GS) five years ago. In 2003, Goldman bought $1.3 billion worth of Sumitomo Mitsui's preferred shares. Within a few months, the Japanese bank's stock traded as low as $1,360 a share. By late 2005, its shares were hitting 10-year highs of more than $10,000.
Playing It Too Conservative?
Still, not all analysts are satisfied with Sumitomo Mitsui's reported acquisition strategy. One gripe is that the bank isn't being aggressive enough at a time when rivals overseas are weak. Critics say that if Japanese banks want to raise their long-term profitability they need to invest more heavily overseas, particularly as earnings-growth opportunities in Japan are hampered by the current economic slowdown.
While that argument may be valid, Japan's bank chiefs can point out that their relatively small subprime exposures are partly because they ignored advice to be more aggressive in the recent past. Haunted by the collapse of the nation's real estate bubble in the early 1990s, Japan's big lenders showed relatively little appetite for the kinds of risk offered by subprime investment.
Indeed, Japan's banks, preoccupied with multiple mergers and huge systems integrations, have been criticized for being too risk-averse. Mizuho, arguably the most aggressive of the Big Three—and the bank with the biggest subprime losses—had won plaudits for showing a desire to increase its earnings power. For the financial year that ended in March, total subprime losses for Japan's roughly 50 banks, insurers, and brokers were $17.6 billion, with Mizuho losing around $6 billion. Combined losses at Citigroup (C), UBS (UBS), and Merrill Lynch exceed $100 billion.