Fukuoka Financial Group Inc., Japan’s second-largest regional bank by assets, will rely on higher earnings rather than stock sales to bolster capital in the next three years, said President Masaaki Tani.
Fukuoka Financial will increase mortgage lending and offer more loans for corporate restructuring to boost profit, Tani said in an interview yesterday at the bank’s headquarters in Fukuoka, on the southern island of Kyushu.
The acquisition of smaller Kyushu rivals Kumamoto Family Bank Ltd. and Shinwa Bank Ltd. in 2007 weakened the company’s capital position. Morgan Stanley banking analyst Graeme Knowd said in a report this month that Fukuoka Financial’s “relatively lean capital” increased concern it may be forced to sell shares to bolster its balance sheet.
“There is a lot of talk in the brokerage world that we’ll sell shares,” said Tani, 67. “Our basic policy is to enhance capital by boosting retained earnings; an equity offering will probably be unnecessary in the next three years.”
The bank had a Tier 1 ratio, a key indicator of its ability to absorb losses, of 6.2 percent as of Dec. 31. That compared with 9.7 percent at Bank of Yokohama Ltd., Japan’s largest regional lender, and 13.9 percent at Shizuoka Bank Ltd.
Fukuoka Financial’s shares have gained 30 percent this year, rebounding from a 16 percent decline in 2009, after it wrote down bad loans from Kumamoto Family and Shinwa. Non-performing loans accounted for 15.7 percent of all advances at Shinwa in March 2008.
Bank of Fukuoka Ltd. created Fukuoka Financial as a holding company to house itself and Kumamoto Family and Shinwa when it took over the smaller companies. The three banks still operate branches under their own names.
While Fukuoka Financial shares have outperformed most Japanese regional lenders this year, they trade at a discount by some measures. The stock is valued at 0.65 times book value, compared with 0.97 times for Bank of Yokohama, according to data compiled by Bloomberg.
“Fukuoka Financial is our top pick among regional banks as we believe the discount should start to narrow as capital is accumulated and Kumamoto Family and Shinwa start to contribute to earnings rather than drag,” Knowd said in a report dated April 14.
Tani said that while he couldn’t completely rule out a share sale as global regulators mull stricter capital rules, it is currently “inconceivable.”
Banks should increase the quality of capital they hold by the end of 2012, the Basel Committee on Banking Supervision said in a report on bank capital and liquidity published Dec. 17.
‘Just an Excuse’
Fukuoka Financial will focus on meeting financial targets, including increasing net income by 43 percent to 40 billion yen ($426 million) in three years, Tani said. It will boost loans by about 1 trillion yen to 9.1 trillion yen during the same period, according to Tani.
Kumamoto Family and Shinwa have room to grow in the mortgage market, Tani said. He added that the stagnant Japanese economy presents an opportunity to increase lending by providing credit to companies that must restructure to survive.
“Some people think it won’t be possible to boost lending in the current economic environment,” said Tani. “To say you can’t increase lending because the economy isn’t good is just an excuse.”