Sumitomo Mitsui to Sell Cross-Holdings With No ‘Rationale’

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Sumitomo Mitsui Financial Group Inc. outlined its policy for owning shares in other companies, joining Mizuho Financial Group Inc. in pledging to sell holdings that it can’t justify on strategic or financial grounds.

The nation’s second-biggest bank by market value will only hold shares where there is a “rationale” to do so, Sumitomo Mitsui said in a statement Friday. Otherwise it will sell them, taking into account factors such as the market impact and the issuer’s financial strategy.

Japanese banks, which traditionally own stakes in other companies to cement ties with clients, are facing pressure to more aggressively trim the holdings in accordance with a new corporate governance code. With Japanese stocks rallying, banks can profit from the sales and bolster their balance sheets, giving them room to increase returns for shareholders.

“Banks can realize significant gains and improve their capital adequacy ratios,” Akira Takai, an analyst at Daiwa Securities Group Inc. in Tokyo, said before Sumitomo Mitsui released its policy.

Sumitomo Mitsui said it determines the rationale for holding stocks based on factors including their profitability and whether keeping them strengthens the relationship with the company. The Nikkei newspaper earlier reported that the bank may issue numerical targets for such stakes later this year.

Banks Vulnerable

Japanese banks’ large cross-shareholdings make them vulnerable to any slump in the stock market, the Financial Services Agency said Friday. The three biggest banks need to take steps to strengthen their capital base, including by reducing risks from stock-price fluctuations, the FSA said in its annual financial monitoring report.

Mizuho, the third-largest lender, last month pledged to dispose of cross-holdings unless they are “meaningful.” It’s important to realize gains on shares, Chief Financial Officer Junichi Shinbo told shareholders at a meeting on June 23.

Japan’s biggest banks still had about 16 trillion yen ($130 billion) in equity holdings as of March, down from a peak of 39 trillion yen, Bank of America Corp. analyst Nana Otsuki wrote in a June 2 report. Sumitomo Mitsui had 3.8 trillion yen and Mizuho held 4.1 trillion yen, according to the note.

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