July 8 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., the Japanese bank looking to buy a stake in a U.S. lender, may consider Ohio’s Huntington Bancshares Inc., KeyCorp or Fifth Third Bancorp as potential targets, said Jeff Davis, an analyst at Guggenheim Securities LLC.
Banks that are weak or nominally profitable would be more willing to sell a stake, Davis said today in an interview. Columbus-based Huntington, Cleveland’s KeyCorp and Fifth Third, with its headquarters in Cincinnati, are among banks that have yet to repay aid from the U.S. Treasury Department’s bank-bailout program. Dallas-based Comerica Inc., which repaid $2.25 billion in rescue funds, may also be a candidate, Davis said.
“Probably the ideal target would be one that needs additional capital, because they’re more likely to say yes,” said Davis, who predicted in July 2008 that the U.S. would experience a “couple hundred” bank failures. Regulators have closed more than 240 banks since then.
Sumitomo Mitsui, Japan’s second-largest bank by market value, may spend as much as $5 billion for a stake in a U.S. commercial lender in the next three years, Hiroshi Minoura, head of international banking at Sumitomo Mitsui Banking Corp., said in a July 7 interview. The company is studying about 20 U.S. banks, Minoura said.
“We can’t overlook the U.S. market in terms of stable returns and size,” he said. “We need to push forward with investments, including acquisitions, that allow us to capture a large volume of assets.”
The capital position of KeyCorp is “fine,” and executives have denied as recently as this week that it wants to be a takeover target, Guggenheim’s Davis said. Still, lenders including KeyCorp may struggle without a “sustained and very robust” economic recovery in the U.S.
“They may be nominally profitable, but from a shareholder perspective they need to sell,” he said.
William Murschel, a spokesman for KeyCorp, declined to comment. Maureen Brown, a spokeswoman for Huntington, and Debra DeCourcy of Fifth Third didn’t immediately respond to messages seeking comment.
An acquisition in the world’s largest economy would support Sumitomo Mitsui President Teisuke Kitayama’s goal of getting 30 percent of banking profit from clients overseas within three years, up from 20 percent last fiscal year. The Tokyo-based bank agreed to invest in India’s Kotak Mahindra Bank Ltd. last month.
Minoura said Sumitomo Mitsui won’t be able to meet its overseas profit target “organically” through growth of its existing businesses outside Japan. He said he’ll probably target banks in the U.S. Midwest or East Coast, declining to name any companies.
“A takeover certainly makes sense from Sumitomo’s perspective,” Davis said. “Japan has been, for 20 or more years, in a deflationary environment. The U.S. would be a natural outlet, but we may be in our own early days of a deflationary, deleveraging cycle.”
Sumitomo Mitsui has raised 1.8 trillion yen ($20 billion) in two stock sales since June 2009 to replenish capital. Though the bank isn’t in any detailed talks now, the size of an investment would probably be $1.5 billion to $5 billion, depending on the target’s size, said Minoura, 54. He said the company would prefer to buy a majority stake, though a minority investment is also a possibility.
Sumitomo Mitsui passed on opportunities to acquire Wachovia Corp. and Washington Mutual Inc. during the financial crisis, Minoura said. Wachovia was bought by Wells Fargo & Co. for $12.7 billion in 2008 and Washington Mutual’s banking operations were sold to JPMorgan Chase & Co.
Sumitomo Mitsui returned to profit in the fiscal year ended March 31 and forecast net income will rise 25 percent to 340 billion yen this fiscal year. That would still be less than half of what the bank earned in the 12 months through March 2006.