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Masamoto Yashiro

Who says there are no second acts in Japanese banking? Shinsei Bank CEO and Chairman Masamoto Yashiro is out to prove there can be--even if Tokyo banks are now the sad sacks of the financial world. And fears are mounting of another bad loan crisis hitting the Nikkei.

Shinsei, which translates as "rebirth," is the reincarnation of Long-Term Credit Bank of Japan Ltd., a banking giant that collapsed with a mighty crash in 1998 and soon after was nationalized. The bank was picked off for little more than $1 billion last year by a clutch of foreign investors led by New York-based Ripplewood Holdings. Ripplewood lured the 72-year-old Yashiro out of retirement in London to undertake one of the biggest salvage operations in Japanese finance. Yashiro had spent eight years building up Citigroup's retail franchise in Japan before stepping down in 1998; he took on the Shinsei job in March, 2000.

Shinsei is living up to its name. While other Japanese banks are posting huge losses in their bids to dispose of dud loans, Shinsei is turning respectable profits. It earned $740 million in net income for the fiscal year ended Mar. 31. It is reinstating a dividend that was suspended when the old LTCB went down in flames. It has one of the cleanest balance sheets in Japanese banking, and it boasts a strong capital adequacy ratio of 13%, as well as cash for growth.

True, Shinsei is lucky. The government agreed to strip out dodgy loans before selling Shinsei to Ripplewood and its backers, which include Mellon Bank, UBS/PaineWebber, and GE Capital Services. That left Shinsei smaller, but it still has about $120 billion of relatively sound assets.

Shinsei's fate will be a matter of intense interest in the months ahead. It is shaping up to be the biggest test case out there for optimists who think the Western business practices now seeping into Tokyo financial markets will have a profound impact. Yashiro is running Shinsei with a laser focus on profits in a town where banks traditionally have served as automated-teller machines for favored corporate borrowers, with little attention to risk.

Yashiro, in contrast, wants to achieve the same 120- to 160-basis-point return on assets that top Western banks earn, rather than the 30 that is typical in Japan. To get there, he has beefed up the consumer side by setting up telephone banking, offering mutual funds, and moving into online banking. Shinsei has just launched a jazzy redesign of its 25-odd branches. And Yashiro ordered up a complete overhaul of Shinsei's IT system. The result is a state-of-the-art network known as FlexCube that keeps track of financial flows. A team of 50 Indian system-integration and software consultants transformed Shinsei's Jurassic-era info-tech system into a cutting-edge version in about 10 months.

A graduate of the prestigious Kyoto University and a fluent English speaker, Yashiro hopes to make money by offering Japanese savers some salvation from the nation's bizarrely low interest-rate structure--the legacy of years of rate-cutting by the Bank of Japan that's great for borrowers but hell for savers. "When you have 1 million yen [about $8,196] in a time deposit for one year at current rates, you get 320 yen [$2.60] after tax," muses Yashiro. "That's not enough to take a bus from your home to the branch and back again."

He figures that Japan's ultraconservative investors are ready to take on more risk in exchange for better returns. Shinsei wants to be there with an array of products from foreign currency deposits to global mutual funds. On the investment banking side, Shinsei hopes to leverage its lending relationship with 450 corporate clients by repackaging and selling their assets and helping them hedge against price shocks and currency moves. Shinsei is also doing a brisk business in repackaging home mortgages and other loans into marketable securities for sale to global investors.

Shinsei faces competition, both foreign and domestic. But the company seems to have the resources and talent to reemerge as a force in Japanese banking. If Yashiro and his Ripplewood backers can pull it off, it could be the best sign yet that Japan's financial markets are emerging from the dark ages.

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