Japan Megabanks’ $6.7 Billion Stock Losses May Spur Selloff

Japan’s biggest banks are poised to accelerate sales of their stock holdings after 534 billion yen ($6.7 billion) in equity investment losses eroded profit.

Combined losses from shareholdings of Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho Financial Group Inc. (8411) more than tripled in the six months ended Sept. 30 from 170 billion yen a year earlier, earnings statements from the Tokyo-based companies showed yesterday.

Mizuho Chief Executive Officer Yasuhiro Sato said his bank may speed up a reduction of stakes in companies and has set up a panel to tackle the issue. Sumitomo Mitsui President Koichi Miyata said he will further reduce the lender’s shareholdings.

The banks have been paring stock investments over the past 15 years to reduce their vulnerability to financial markets as Japan’s Nikkei 225 Stock Average (NKY) remains 77 percent below its 1989 peak. The faster they sell, the more disruptive it may be for the world’s third-largest economy, which is shrinking as companies from Sharp Corp. (6753) to Panasonic Corp. forecast losses.

“Megabanks should carefully and gradually cut their shareholdings to mitigate fluctuation risks and further stabilize their management,” Koichi Haji, an executive research fellow at NLI Research Institute in Tokyo. “If they rush to sell them off, they’d see an adverse impact on Japan’s economy as a whole and further weaken lending demand.”

Shares Rise

Bank shares climbed today amid speculation a possible new government may push for more aggressive central bank action, a day after Prime Minister Yoshihiko Noda called for elections. Sumitomo Mitsui closed 3.3 percent higher at 2,448 yen and Mitsubishi UFJ gained 3.2 percent to 356 yen. Mizuho jumped 3.3 percent to 126 yen.

The Nikkei 225 advanced 1.9 percent. The gauge has lost 12 percent since March 31 as Japan’s economy worsened amid waning demand for exports. Gross domestic product shrank an annualized 3.5 percent last quarter, the most since the earthquake and tsunami in March 2011.

Stock holding losses at Mitsubishi UFJ, Japan’s biggest bank, widened 79 percent to 173.6 billion yen in the fiscal first half from a year earlier. Net income declined 45 percent last quarter to 107.6 billion yen, according to Bloomberg calculations based on the half-year figures released yesterday.

Reducing Stakes

Mitsubishi UFJ has moved ahead with a project over the past four years to reduce its stakes in other companies by about 700 billion yen, Chief Executive Officer Katsunori Nagayasu said at a briefing. The bank plans to reduce the stock holdings by “hundreds of billions of yen” in the coming years, he said.

At Sumitomo Mitsui, losses stemming from stocks surged more than 10 times to 132.9 billion yen in the first half. Japan’s second-largest bank by market value raised its full-year profit forecast by 13 percent to 540 billion yen, led by gains from government bond trading and lending. Net income almost doubled to 213.2 billion yen last quarter.

“The impact on our bank from cross-shareholdings is big,” President Miyata said.

The lender’s holdings include Panasonic, which yesterday said it plans to cut 8,000 jobs in the second half of the fiscal year as it restructures amid falling demand for televisions and a rising yen.

Mizuho Losses

Mizuho, the country’s third-biggest bank by market value, booked 227.6 billion yen in losses tied to equities in the six months ended September. That contributed to a more than 99 percent drop in net income to 356 million yen last quarter.

The lender’s corporate banking unit has a 3.77 percent stake in Sharp, which has tumbled 75 percent this year, the most among companies on the benchmark Topix Index (TPX), after forecasting a record full-year loss.

Mizuho maintained its 500 billion yen full-year profit forecast and Mitsubishi UFJ kept its target of 670 billion yen.

Japanese banks, which hold shares of allied enterprises in part to cement ties, have been paring their stakes in recent years. Banks’ stock holdings dropped to 16.2 trillion yen as of Aug. 31, the lowest since October 1997, when lenders held 47.9 trillion yen of shares, according to central bank data.

“Risks stemming from shareholdings are now at a manageable level,” said Shinichi Ina, a Tokyo-based banking analyst at UBS AG. “But this is clearly an issue that megabank executives should continue tackling, while gauging the impact on Japan’s stock market from a selloff.”

Japanese banks also risk incurring losses from their near- record holdings of government bonds, which they have been stockpiling as borrowers shun credit amid deflation. Lenders are exposed to a spike in bond yields, the International Monetary Fund warned in August, echoing remarks by Bank of Japan Governor Masaaki Shirakawa.

Major banks in Japan would face 3.7 trillion yen in losses if yields rise by 1 percentage point, the central bank said Oct. 19. The country’s lenders held 167 trillion yen of Japanese sovereign debt as of Aug. 31, close to the record 171 trillion yen reached in March, central bank data show.

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

To contact the editor responsible for this story: Russell Ward at rward16@bloomberg.net

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