Sumitomo Plans to Sell Banks in California

Japan’s Sumitomo Bank Ltd. said Friday that it is seeking to sell its California banks, a move that analysts predicted will spark a major Asian retreat from the U.S. financial industry because of the economic turmoil engulfing Asia.

Hobbled by the crisis at home and burdened with hundreds of billions of dollars in soured loans, Japanese banks such as Sumitomo and other Asian banks--notably those based in struggling South Korea--are looking for ways to shore up their financial health.

Shedding some or all of their U.S. operations is becoming an option of choice, especially because those operations will fetch U.S. dollars that have risen sharply in value against their home currencies, analysts said.

Sumitomo’s action “is just the beginning,” said Kelvin Lee, a director at the accounting and consulting firm Deloitte & Touche. “Once you see Sumitomo find a buyer [and] if the price is reasonable . . . you may see other people follow suit.”

Sizable though some of the Asian institutions are, they remain niche players in California’s huge banking industry with less than 10% of the market combined. As a result, their sale would not be expected to significantly alter either the national or California banking landscape.

Analysts also said that because the U.S. operations of Asian banks are generally in sound financial shape, depositors do not need to be alarmed if such banks change hands. Consolidation and mergers have become routine throughout the U.S. banking industry.

Some analysts had feared that Japanese banks might try to raise capital by selling their vast holdings of U.S. Treasury bonds, which could push U.S. interest rates higher. But others said Sumitomo’s action appeared to be an alternative that others might follow.

Regardless, Japanese and other Asian banks “have to downsize, and they’re going to downsize outside their home market by selling off the best assets they have overseas,” said Bert Ely, whose Ely & Co. banking consulting firm is in Alexandria, Va.

Wall Street too is betting on more sales. The stock representing the public’s minority ownership of UnionBanCal Corp.--which is the parent of Union Bank of California and is majority-owned by Japan’s Bank of Tokyo-Mitsubishi--soared $8 a share Friday, to $99, on the Nasdaq market amid speculation it too might be jettisoned.

If such a scenario occurs, it would be a stark change of course from a decade ago, when Asian financial institutions briskly expanded into the U.S. banking and real estate markets, often using California as a beachhead. “This is a big reversal of strategy,” said analyst Ricardo Kleinbaum of PaineWebber in New York. And Sumitomo’s action “sends a signal to other Japanese investors that it’s OK to think about selling U.S. assets.”

Sumitomo owns 85% of Sumitomo Bank of California, which has 47 branches and $5.2 billion in assets, making it the sixth-largest bank in the state, according to the California Bankers Assn.

The bank said it hired the investment banker Goldman, Sachs & Co. to help it decide on a sale or some other disposition of the California bank, but noted “no decision has been made.”

The largest Asian-owned bank in the state, with assets of $30 billion, is Union Bank of California. Its majority owner, Bank of Tokyo-Mitsubishi, is the biggest bank in the world with $752 billion in assets. Another major player in the state is Sanwa Bank California, which has $8 billion in assets, 106 branches and is owned by Japan’s Sanwa Bank.

Another Asian-owned bank in California is Indonesia’s Lippo Bank, which has been swept up in the scandal over foreign donations to U.S. political campaigns. But overall, Lippo is a very small player among California financial institutions.

Other small Asian-owned banks in the state include the Los Angeles branch of Korea Exchange Bank, which has five U.S. offices and is owned by a Seoul-based parent of the same name; and East West Bank, which is owned by Indonesian interests and has $1.6 billion in assets.

Woon Seok Hyun, Korea Exchange’s general manager, said his bank has no plans to close any of its U.S. offices, and that the International Monetary Fund’s new $57-billion rescue plan for South Korea could soon ease the hardship felt by South Korean companies and banks alike. But in the meantime, he said, “we are going to make no new loans.”

Union Bank spokesman Andrew Porterfield declined to speculate on what his bank’s parent has planned. Keith Karpe, a spokesman for Sanwa Bank California, said “we have a firm commitment to remaining in California.”

Even so, the big Japanese banks “tend to act in unison” on strategic moves such as Sumitomo’s, Kleinbaum said. Also, it’s likely that Sumitomo made its decision with the blessing of Japan’s Ministry of Finance, which could be the green light that other Japanese banks would use to exit the U.S. market, he said.

But analysts said the buyer of Sumitomo’s California bank and any other Asian-owned banks will face a stiff challenge: maintaining the banks’ strong ties to the Asian American communities, whose businesses and individuals are the banks’ key customers.

“One of the tricks for the buyers is going to be maintaining those relationships,” Ely said.

There’s another compelling reason for Sumitomo and the others to consider selling their U.S. assets: It’s a seller’s market right now. The merger wave engulfing U.S. banking has placed premium prices on banks that come up for sale.

Shares representing the public’s minority stake in Sumitomo Bank of California had soared 70% this year even before Sumitomo’s announcement Friday. After the announcement, the stock surged $10.38 a share, to $51, on Nasdaq.

The Japanese banking system is weighed down by officially estimated bad loans of about $220 billion.

Times staff writer David Holley in Tokyo and Bloomberg News Service contributed to this story.

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California’s Asian Banks

The seven largest Asian-owned California banks hold around an 8.18% share of the the state’s banking industry. A look at the state’s nine Asian-owned banks with assets greater than $500 million:

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California assets, Rank Bank in billions 1 Union Bank of California $30.2 2 Sanwa Bank of California 8.07 3 Sumitomo Bank of California 5.20 4 East-West Bank 1.64 5 Tokai Bank of California 1.63 6 Manufacturers Bank 1.20 7 Bank of Canton of California .835 8 California Korea Bank .573 9 Dai-Ichi Kangyo Bank of California .525

Calif. market Rank Base share* 1 San Francisco 4.78% 2 San Francisco 1.43 3 San Francisco 1.09 4 San Marino 0.32 5 Los Angeles 0.35 6 Los Angeles ---- 7 San Francisco 0.11 8 Los Angeles NA 9 Los Angeles 0.10

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Total California market share: 8.18%

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Note: Asian-owned banks are based in Japan, except Indonesian-owned East-West Bank, Chinese-owned Bank of Canton of California and Korean-owned California Korea Bank.

* Does not include market shares for numerous smaller Asian-owned California banks.

Researched by JENNIFER OLDHAM / Los Angeles Times

Sources: California Bankers Assn.; Sheshunoff Inc.