Sumitomo Will Acquire Ailing Japanese Bank : Merger Will Make It Japan’s 2nd-Largest Bank

Sumitomo Bank has agreed to take over a large regional mutual bank threatened with bankruptcy in a merger that will transform Sumitomo into Japan’s and possibly the world’s second-largest bank.

The move was approved by the boards of directors of both banks Saturday.

Kazumasa Tashiro, president of Heiwa Mutual Bank, and Koh Komatsu, president of Sumitomo, agreed to draw up a specific merger agreement by May, get it approved at stockholders meetings in June and carry out the merger Oct. 1.

Tashiro and Komatsu then visited Finance Minister Noboru Takeshita and Satoshi Sumita, governor of the Bank of Japan, both of whom gave their blessings to the merger.

Takeshita said the merger would guarantee the security of Heiwa Mutual Bank’s depositors and ensure continued confidence in the Japanese banking system. No Japanese bank has gone bankrupt since the end of World War II.

Special Loans Possible

Sumita said the central bank would help facilitate the merger with special loans, if such financing was found to be necessary.

The Finance Ministry, in an inspection of the mutual bank that ended in late January, discovered problem loans amounting to $2.9 billion, or half of the bank’s total loans. Of the problem loans, no interest was being paid on $2.1 billion of loans. Another $973 million of loans were regarded as likely not to be repaid.

At the urging of the Finance Ministry, Heiwa Mutual’s board of directors called a special meeting Feb. 7 and accepted the resignations of three directors and the bank’s auditor. The executives had been called the “gang of four” and were considered responsible for approving the bank’s questionable loans.

Sumitomo, according to the newspaper American Banker, ranked third in the world in both deposits ($89.9 billion) and assets ($112.2 billion) at the end of 1984 behind two other Japanese banks, Dai-Ichi Kangyo and Fuji. Its wholly owned subsidiary, Sumitomo Bank of California, had $2.5 billion in deposits and $2.8 billion in assets at the end of 1984.

Heiwa Mutual has $6.2 billion in deposits and operates 110 branches in the Tokyo area. It ranks sixth in size among the 69 mutual banks in Japan at the end of 1984.

Closing on Number One

The merger will send Sumitomo past Fuji Bank and put it on the heels of the world’s largest bank, Dai-Ichi Kangyo Bank, which had $95.1 billion in deposits and $118.5 billion in assets at the end of 1984, according to American Banker.

The largest American bank in terms of deposits, Citibank of New York, took the top spot at the end of last year from San Francisco-based Bank of America, according to figures compiled by American Banker. Citibank, the fifth-largest bank in the world, is also the largest U.S. bank in terms of assets.

“Frankly, Sumitomo getting 110 branches in one fell swoop in the Tokyo area is a threat,” said Tsuneo Wakai, managing director of Mitsubishi Bank, Japan’s fourth-largest bank. He said it would improve Sumitomo’s ability to lend to small enterprises and to engage in trading of securities.

Although it is a nationwide bank, Sumitomo is headquartered in Osaka and lags behind other major city banks in the number of branches in the Tokyo area.

The Finance Ministry reportedly discovered Heiwa Mutual’s shaky loans and had urged the bank to rectify the situation some years ago. But the ministry made no announcement of the formerly family-operated bank’s troubles.

Loans to Politicians

Among those troubles were reports of large loans to politicians to finance election campaigns and inner-party maneuvers at the time of the selection of the ruling Liberal Democratic Party’s president, who becomes prime minister.

The bank also had invested heavily in leisure facilities operated by relatives of the owner and was reported to have lost large sums in financing corporate takeover efforts.

For nearly a year, the Finance Ministry and the Bank of Japan studied means by which the mutual bank might be rescued without a merger, including soliciting help from all 13 of Japan’s city banks. Government authorities, however, reportedly failed to win a promise of cooperation from the others.

Sumitomo was asked to take over the mutual bank because about one-third of the latter’s stock is held by a company whose main source of credit is Sumitomo Bank. In addition, Sumitomo, as Japan’s most profitable bank, was considered best equipped for the rescue.

Tashiro received assurances from Komatsu that all of the mutual bank’s employees will be kept on the payroll. Komatsu told Tashiro that Sumitomo plans to manage the branches now run by the mutual bank as an independent division after the merger.