Earnings of Japan's three largest banks hurt by losses in their equity portfolios, renewing concerns about banks' practice of investing in clients' companies, particularly country's embattled electronics makers

Cindy Allen

Cindy Allen

Nov 14, 2012 – Thomson Reuters

TOKYO , November 14, 2012 () – Japan's three mega banks posted earnings that were dragged down by heavy losses on their equity portfolios, renewing investor concerns about the practice of lenders holding stakes in clients including the country's money-losing electronics makers. Combined stock-related losses at Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG) more than tripled in April-September from a year earlier as the benchmark Nikkei average declined 12 percent over the six-month period.

Shares in embattled Sharp Corp have plunged nearly 70 percent since the start of the fiscal year as the firm struggled with competitive markets and a strong yen. Yet in September, MUFG and Mizuho, which hold stakes in the troubled TV maker, agreed to extend 360 billion yen ($4.53 billion) in additional loans to the 100-year-old debt-ridden company.

"Although banks say they will make further reductions in stock holdings, they are unlikely to drastically cut their exposure in the short term as it's hard to sell stocks in this market," Chikako Horiuchi, director at Fitch Ratings in Hong Kong, said before the earnings announcements on Wednesday. "So, their challenge is to come up with effective hedge measures."

While banks are bound by law to limit their holdings to small stakes of under 5 percent, they have a large number of holdings across many industries. That exposes them to the ups and downs in the Japanese economy, which shrank in the September quarter for the first time since last year.

Panasonic Corp is axing another 10,000 jobs by end-March as its businesses continue to bleed money and its shares languish at multidecade lows. Still, Japan's biggest commercial employer managed to win $7.6 billion in loan commitments last month from banks that include MUFG and SMFG.

STOCK-RELATED LOSSES

Total stock-related losses at Mizuho, MUFG and SMFG widened to 534.1 billion yen ($6.72 billion) in the fiscal first half from 169.5 billion yen a year ago, their earnings reports show.

"We have been continuously reducing equity holding. It's a shame that we had to book such large (stock-related losses)," Mizuho President Yasuhiro Sato said at a news briefing. "It's hard to find ways to sell clients' shares without affecting our business with them."

In the quarter ended September, Mizuho's net income plunged 99.8 percent to 356 million yen, while MUFG, Japan's biggest bank by assets, saw a 45 percent slump to 107.6 billion yen.

SMFG booked a profit increase of 99 percent to 213.2 billion yen, helped by investment gains from the trading of government bonds.

Japan's big banks have shed billions of dollars of equity holdings in the past decade to reduce their exposure to stock market volatility. While the banks say publicly they will make further cuts in their holdings, some executives privately acknowledge they are slow in coming.

LOAN BOOK

Outstanding loans by Japan's big banks fell for a 36th straight month in October, Bank of Japan data shows, after the country's economy shrank in July-September.

To counter a poor domestic loan book, SMFG, Mizuho and MUFG have aggressively expanded overseas, and their efforts are starting to pay off. The banks' overseas lending showed strong growth in the first six months.

Earlier this year, SMFG acquired Royal Bank of Scotland's aircraft leasing business for $7.3 billion.

In June, Mizuho said it had agreed to buy a Brazilian unit of Germany's WestLB.

Shares of Mizuho have climbed some 17 percent this year, while SMFG is up 10.5 percent and MUFG is 5.5 percent higher.

The three lenders have so far outperformed a 2.5 percent gain in the benchmark Nikkei average

Japanese banks also dominate global project finance, with MUFG ranking No.1 in the league table of mandated arrangers for January-September, Thomson Reuters data shows. SMFG and Mizuho held the No.3 and No.4 spots, respectively.

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