In a move that promises to shake up Japan's entrenched financial system, three large Japanese banks confirmed early today that they have agreed on an alliance that would create the world's largest banking group.
Analysts said the combination of two commercial banks--Dai-Ichi Kangyo Bank and Fuji Bank--plus the Industrial Bank of Japan, a long-term-credit bank, could pave the way for a host of other bank mergers and serve as a model for corporate consolidation.
The decision to take such a bold step after years of industry paralysis reflects just how pressed Japan's banking industry is after a "lost decade" of festering bad loans, the recent onslaught of foreign competition and the prospect of further deregulation.
"They've been standing on a cliff," said Tetsuo Fujita, a senior economist at Japan Research Institute.
The financial industry's lead in cutting jobs in the last year has been followed by corporations, and this deal sends a strong signal in Japan that mergers across keiretsu lines are now acceptable.
Keiretsu are powerful Japanese corporate groups, with globally recognized names such as Mitsubishi and Sumitomo, that have traditionally showed an almost tribal distrust of one another.
The stocks of all three banks shot up more than 11% on the news.
As outlined by analysts and Japanese media reports, the three banks would form a joint holding company Oct. 1, 2000. At $1.2 trillion, their combined assets would be larger than Germany's Deutsche Bank at $735.3 billion and Bank of Tokyo-Mitsubishi at $652 billion and make them the world's largest.
Analysts add, however, that cost-cutting and consolidation remain a huge challenge for the group, and assets would probably fall to about $900 billion in the next five years, assuming the deal goes through.
"To be successful, we'll have to see downsizing the likes of which Japanese banks have never seen," said Brian Waterhouse, banking analyst with HSBC Securities.
Fuji Bank has been the subject of insolvency rumors, while DKB has branches in all 47 Japanese prefectures but has lacked a clear focus, analysts said. And IBJ is quickly seeing the disappearance of its raison d'etre as Japanese financial markets develop and obviate its traditional corporate funding role.
Together, the three second-tier players would complement one another's strengths and build economies of scale, analysts said. "It's a nice fit," said Robert Zielinski, head of Asian bank research at Lehman Bros. Japan.
In the current environment, Japanese banks are not able to grow their assets, so focus shifts to cost-cutting, better technology and efficiency. The injection of $60 billion in public funds in March finally allowed the industry to start thinking about a survival strategy.
Another impetus for the move is the entry of huge numbers of foreign fund management companies seeking access to $11 trillion in personal savings sitting in low-interest Japanese postal savings accounts. Some Japanese bankers say foreign financial institutions are a decade ahead in offering new products, using sophisticated risk technology and operating in a global environment.
The three banks have various securities operations that, if combined, would create Japan's fourth-largest securities company. But putting together the various pieces remains a huge task.
The game plan now calls for a three-year period to consolidate operations and streamline staff. But analysts say that may be too long, given the pace of change. "These three banks will have to step it up," said Katsuhito Sasajima, banking analyst with Warburg Dillon Read.
Some predict the world will eventually see 10 mega-banks. Europe and the U.S. have been far more aggressive about consolidation up until now, with Deutsche's acquisition of Banker Trust and the merger of Citibank and Travelers Group.
IBJ has 4,752 employees and 27 branches, DKB has 16,090 workers and 334 branches and Fuji has 13,976 employees and 284 branches. The combined group is expected to cut at least 6,000 employees and about 150 branches.
Substantial cuts are far more difficult in Japan with its tradition of lifetime employment. "Slash-and-burn techniques can't be applied here," said HSBC's Waterhouse.
Whether this signals the eventual return of a strong Japan on the global banking scene remains to be seen--and at any rate will be several years away. But analysts said that after years of inaction in the face of mounting problems, as the industry slowly wrote down about $480 billion in non-performing loans, this merger would be an important step in the right direction.
Etsuko Kawase in The Times' Tokyo bureau contributed to this report.