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Global Economics

Japan's SMFG to Raise $5.8 Billion in Share Sale

The financial group announced it will raise the money to shore up its tier-1 capital. Japanese banks continue to suffer from a slowing economy, narrow interest margins and excessive exposure to the stock market

The latest capital raising exercise by Sumitomo Mitsui Financial Group (SMFG) shows that Japanese banks are weak, although for different reasons than their Western counterparts who have been hurt by their exposure to the subprime crisis. Japanese banks are suffering from a slowing economy, narrow interest margins and excessive exposure to the stockmarket. So, like Western banks, they are busy raising capital.

The ¥538.2 billion ($5.84 billion) worth of perpetual preference shares SMFG plans to issue through a private placement on December 18 should take some of the pressure off the company's capital adequacy ratios, which have become increasingly thin. An unconfirmed rumour that SMFG, the smallest of Japan's mega-banks by assets, could add an extra ¥260 billion to the sum already announced gave the market further reason to cheer, and helped push SMFG's share price 9.6% higher to ¥342,000 in Thursday's trading. (The counter reached a high of ¥1.36 million in 2006.)

According to Reuters, the preference shares will be taken up by a collection of around 20 Japanese institutional investors, including real estate and insurance companies.

SMFG's announcement on Thursday follows a decision made public on November 19 to set up a wholly owned overseas special purpose subsidiary in the Cayman Islands to issue perpetual preference shares. The proceeds will partly be used to redeem an existing series of bonds maturing on January 26, 2009, which amounts to ¥283 billion. The remaining ¥255 billion will be added to the existing tier-1 capital of ¥4.5 trillion, an increase of under 6%. That means the extra capital raising

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