After New York-based Ripplewood Holdings LLC took over Tokyo's venerable Long-Term Credit Bank in 2000 and renamed it Shinsei Bank Ltd., Japan's financial community feared the worst. Foreign barbarians had progressed beyond the gates and fought their way to the heart of the country's banking system. Now they were poised to do something long considered anathema by Japanese bankers: actually cut off debtors with no realistic chance of paying back their loans.
Three years later, the results of that takeover are becoming clear. And it looks like the gaijin might have done some good after all. From a lender with $17.5 billion in bad debts, an antiquated information-technology system, and a reputation for corruption and incompetence, Ripplewood has created a profitable, modern bank. For the fiscal year ending in March, Shinsei is on track to report net earnings of $600 million. Of course the turnaround was helped by the government's assumption of much of LTCB's bad debt. Still, Shinsei today is making money because it is a different kind of bank -- one that many see as a model for the Japan of the future. Some 40% of its profits come from fee-based services such as investment banking and securitization of debt, instead of the low-margin corporate lending that dominated LTCB's business. And thanks to improved earnings and tough loan collecting, Shinsei's capital equals a comfortable 20% of its assets -- compared with just over 10% for Tokyo's biggest banks.
Now comes payback time for the gaijin. Five years after LTCB's shares were delisted in the wake of the bank's collapse, Shinsei is planning an initial public offering. Top executives at Shinsei say they're in a pre-IPO "quiet period" and declined to discuss the listing or any aspect of current operations. Yet market sources say the bank has hired brokerage Nikko Citigroup Ltd. (C) as lead underwriter. Shinsei Chairman Masamoto Yashiro has said the listing will happen in early 2004, though many in Tokyo believe it could yet happen this year. After all, the Nikkei is up 31% from the 20-year lows it hit in April, and bank stocks have rallied 10% as the sector's earnings have improved and the banks have made progress in writing off nonperforming loans.
`HUGE UNREALIZED GAINS'
Just how much would the deal be worth? Investment bankers think Shinsei will have a market cap of about $9.2 billion, which would be sweet news for Ripplewood CEO Timothy C. Collins. Ripplewood and its backers, including UBS (UBS), Deutsche Bank (DB), and GE Capital (GE), paid just $1.2 billion for the 99% of Shinsei they own. "They are certainly sitting on some huge unrealized gains," says Barclays Capital Japan Ltd. analyst Jason Rogers.
Unless the market collapses in coming weeks, Shinsei is likely to offer a bigger payout than crosstown rival Aozora Bank Ltd. Its primary owner, broadband purveyor Softbank Corp., paid about $440 million for the former Nippon Credit Bank, which failed in 1998. In August, Softbank sold half of Aozora to U.S. investment fund Cerberus for about $881 million -- roughly book value for the shares. Shinsei, by contrast, might fetch as much as 1.5 times book value for the 30% or so of its stock Ripplewood is likely to offer, bankers say.
Is Shinsei really worth that kind of premium? Probably. For starters, its managers have shown they have the determination to make the kind of tough decisions few Tokyo bankers can. When struggling retailer Sogo came back for a fresh infusion of cash after defaulting on its loans in 2001, Shinsei shut off the money flow and told Sogo to sink or swim. It sank -- though Yashiro had to appear before the Japanese Diet to defend his decision to cut Sogo off, arguing that if he hadn't the company would have taken Shinsei down with it. And when the government balked at assuming loans whose value fell by 20% or more -- as required in the takeover contract -- Yashiro held firm and finally got what he wanted.
Now, financial executives, shareholder activists, and foreign bankers are hoping Shinsei will serve as a case study in banking reform for Japan. Indeed, a successful offering will go a long way toward convincing Japanese financial authorities that Western-style banking practices can turn around even failed banks given up for dead -- like LTCB.
Some of Shinsei's success can be attributed to Yashiro's spending on technology. In 2001 he launched a $55 million overhaul of Shinsei's IT system that lets the bank track the profitability of every financial product it offers, something LTCB couldn't do. The new computers also give Shinsei the flexibility to roll out 24-hour ATMs, Internet banking, and call centers operating round the clock, none of which LTCB offered. Shinsei only has 29 brick-and-mortar branches in its network, vs. 450 for rival Mizuho Financial Group Inc., but 40% of its new accounts are opened online.
SHOWING THE WAY
Even as it plans for its IPO, Shinsei is broadening its reach via acquisitions. On Nov. 4, the bank announced plans to buy the credit-card business of Tokyo-based Teijin Finance Ltd. Shinsei is also part of a team looking to buy a 9.1% government stake in Kookmin Bank, South Korea's biggest, which would give it an overseas presence. And Shinsei is angling for a bigger piece of Japan's securitization market. In April, it acquired $185 million in home mortgages from a regional lender, Fukushima Bank Ltd., that it hopes to repackage into bonds and sell off to domestic and international investors.
After the IPO, though, Shinsei will have to remain vigilant if it is to keep prospering. It's only Japan's eighth-biggest bank in terms of assets. And most of those bigger outfits are awakening from years of apparent slumber. Now, they're attacking the same markets -- wealthy retail clients, investment banking, and securitization -- that Shinsei is gunning for. There's also the question of succession. The 74-year-old Yashiro is expected to step down next fall and will likely be replaced by Thierry Porte, who took over as Shinsei's vice-chairman on Nov. 1. Most observers think he's a good choice. Before joining Shinsei, Porte was president of Morgan Stanley Japan Ltd. (MWD), and his contacts and dealmaking skills could prove invaluable to Shinsei as it expands its investment banking business. "Porte has great street cred," says Anthony M. Miller, Asia managing director at hedge fund Ramius Capital Group, which has business ties with Shinsei. Another barbarian beyond the gates, perhaps, but the results may be downright civilized. By Brian Bremner in Tokyo