Sumitomo to Merge With Troubled Bank
In what appears to be a government-sponsored bailout, Sumitomo Trust & Banking Co. said Friday it plans to take over the ailing Long-Term Credit Bank of Japan, which had been struggling to survive amid bad loans and sagging investor confidence.
The deal would reportedly create the second-largest bank in Japan and avert what some analysts think might otherwise have been Japan’s largest corporate failure since World War II.
The merger is the biggest in Japan’s struggle to shore up its banking system, which is said to be saddled with as much as $800 billion to $1 trillion in bad or marginal loans. The U.S. and other nations have been pushing Japan to move quickly and aggressively in tackling its banking crisis.
But the deal sparked controversy about whether the government should be propping up troubled banks such as LTCB or simply letting them fail, free-market style. (Most consumers wouldn’t be directly affected, since depositors are insured until 2001.)
Indeed, in the last few days, the yen has been weakening against the dollar, as the markets apparently think Japan is only prolonging its problems. The yen closed at 142.15 per dollar Friday in New York, weakening for a fifth straight day.
“The government did it again with Japanese-style problem-solving, which the rest of the world is not looking for,” said Hiroshi Yamamura, chief economist at NLI Research Institute in Tokyo. “It will not lead to restructuring.”
The merger combines Sumitomo Trust, which reported assets of about $103 billion last September, with LTCB, which listed assets of $199 billion last September. LTCB reportedly has acknowledged about $10 billion in bad loans, though many suspect that the actual figure is far higher.
Sumitomo said it had only agreed to take on LTCB’s healthy loans, while the rest would be disposed of through a kind of collection agency modeled after the U.S. Resolution Trust Corp. For the fiscal year that ended March 31, LTCB reported a loss of $2.3 billion after writing off about $4.3 billion in bad loans, calculated at current exchange rates.
Sumitomo Trust President Atsushi Takahashi said the government had agreed to inject public funds into the combined banks to meet capital adequacy requirements, if necessary. At a hastily convened news conference late Friday night in Tokyo, he said he had received a call on Monday from a top LTCB official, whom he subsequently met with to discuss the merger. He then discussed the idea with central bank officers and other key government officials. The merger will take place within a year, he said.
But Yamamura and other analysts speculated that the government had actually arranged the Sumitomo-LTCB marriage to save the struggling LTCB after prospective alliances with other institutions had fallen apart.
“I wonder if a couple in an arranged marriage will actually sleep together or simply live under the same roof,” Yamamura said.
Few details of the proposed acquisition were disclosed, including financial terms. Takahashi said he expects the merger to be consummated within a year and wants the merged bank to retain the Sumitomo name and top management.
It isn’t entirely clear how healthy the proposed alliance will be. Both institutions have their problems.
Last week, Moody’s Investors Service said it had an “increasing level of concern about the [LTCB] bank’s deteriorating financial fundamentals, especially asset quality and economic capitalization and its very limited financial resources to absorb prospective credit expenses.”
But when asked if LTCB technically was bankrupt, president Takahashi replied, “My understanding is their assets are healthy.” Then he added, “We hardly talked about the content of LTCB’s assets.”
When asked by a reporter why Sumitomo had agreed to the acquisition without knowing how deep LTCB’s problems are, Takahashi replied, “We agreed to the merger with the condition that we will only take over healthy loans.”
Sumitomo Trust’s debt ratings have also been placed under review for a possible downgrade by Moody’s recently. “The financial condition of Sumitomo Trust has been notably weakening,” the agency wrote in a report this month. “Moody’s is concerned that its exposure to certain problematic borrowers may result in significant losses in a relatively short period of time under the current economic climate.”
Takahashi arrived at the Friday evening news conference in Tokyo after a shareholder meeting in Osaka, in which officials reportedly outlined cost-cutting measures for LTCB and said they were seeking a merger partner.
LTCB was created after World War II to help finance big companies, but their original role has diminished amid mounting competition, and the bank had unsuccessfully diversified.
The deal was not officially announced until long after the Tokyo Stock Exchange closed, but news had leaked out earlier. The exchange halted trading of the two stocks about 25 minutes before the normal closing. At that time, Sumitomo Trust’s stock had dipped 1.03%, or 20 yen, to close at 648 yen in Tokyo trading, while LTCB’s leaped 21%, or 15 yen, to close at 73 yen.
