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Inching Out From Under

Inching Out From Under

Sakura Bank Ltd. may have the weakest balance sheet of any of Japan's troubled big banks. Its nonperforming loans equal about six years' worth of core profits, says James Capel Pacific Ltd. But investors suddenly don't seem to mind. When a new issue of $960 million in preferred Sakura shares started trading on the Tokyo Stock Exchange on Apr. 1, they commanded a 14% premium over the bank's common stock. That's because investors are confident that Sakura's debt problems will soon be history.

For Sakura and other Japanese banks burdened by the collapse of the 1980s real estate bubble, prospects are beginning to brighten. Japan's banks and bureaucrats are now serious about dealing with the estimated $300 billion in bad debts looming over the nation's economy. Both sides realize that if they don't act, the nascent economic recovery may die for want of new lending. So banks are writing off loans at a pace more than three times that of last year (chart). To clean up their balance sheets, banks are even testing long-standing Ministry of Finance decrees. For their part, MOF officials are calling for bankers to follow the example of their American counterparts in dealing quickly with problem loans.

QUICK FIX. So far, the turnaround effort is relying heavily on some fancy accounting. The banks have salted away billions of bad debt at the Cooperative Credit Purchasing Co., a holding company created by the government in March, 1993. Under a complicated scheme, the banks provide interest-free credit to the CCPC, which then buys their bad loans. The CCPC purchased loans with a face value of $25.5 billion in the six months ended Mar. 31, at an average discount of 56%. The resulting $14.2 billion in tax write-offs has flowed straight to the banks' bottom lines. Meanwhile, the day of reckoning has been pushed into the future. So far, the CCPC has only liquidated $290 million in bad real estate underlying the debt.

But the CCPC has given the banks room to maneuver. Sakura hopes to write off $2.8 billion in bad loans this year and an additional $2.8 billion next year. Sumitomo Trust & Banking Co. plans to write off $1.1 billion this year. Bank of Tokyo Ltd. will dispose of approximately $3.3 billion--virtually all the bad debts it has afficially declared. In the fiscal year just ended, Japan's 21 biggest banks wrote off or added reserves against $35 billion in shaky loans, compared with just $10 billion the year before.

Like Sakura, many banks are raising capital, allowing more write-offs. Daiwa Bank Ltd. recently sold $480 million in bonds that investors must eventually convert to stock. Fuji Bank Ltd. is one of the banks expected to come to market with similar forced-conversion bonds or preferred shares.

"RADICAL ACT." More assertive bankers are even talking about taking on the bureaucrats. For years, a MOF "guidance" prohibited banks from cutting dividends. But on Mar. 23, Hokkaido Takushoku Bank Ltd. hinted that it would cut its dividend almost 30%. Some bankers predict the end of a MOF policy prohibiting major banks from reporting net losses, which would make it easier to write off loans. "For Japanese banks, this is a radical act," says one banker in Tokyo.

Bankers are enlisting Americans to put gentle pressure on regulators to let them take the next step--adopting more sophisticated ways to dump troubled properties. Goldman, Sachs & Co. has been presenting MOF officials with outlines of securitization schemes for bad debts, for example. Nisho Iwai recently hooked up with the U.S. real estate investment banking firm of Kennedy Wilson International to put Kennedy's experience with real estate auctions to work in disposing of bad property. Nisho Iwai says the partners hope to approach MOF officials later this year with a scheme for all of Japan's banks.

Regulators talk as if they have changed their spots. Bank of Japan Governor Yasushi Mieno in a Mar. 24 speech held up the example of U.S. banks' quick action on their bad debts by discounting sales to investors. Mieno urged Japanese banks to do the same. Yet the conservatives remain in command at MOF, where bureaucrats worry that open-market sales of collateral would only result in a free fall in reported real estate values. Moreover, such a market would give foreigners the chance to buy big chunks of Japanese land. "The inner circle in Japan probably won't allow that to happen," predicts Kiyoshi Morofushi, senior deputy general manager at Bank of Tokyo.

However, they may be convinced otherwise. For instance, Secured Capital Corp., a U.S. real estate banker, has set up shop in Tokyo and has been helping Japanese banks sell off their American problem debt and collateral through auctions like those pioneered by the Resolution Trust Corp. in the U.S. Secured Capital's Tokyo representative, Kenneth M. Curtis, says a Japanese bank recently asked him to talk to MOF officials to find out what they think of Secured Capital's method for use in Japan.

Meanwhile, pressure on the banks to do even more is building. The weak Japanese stock market is eating away at the keiretsu holdings that count as bank capital. Some of the banks' credit ratings are slipping as Standard & Poor's recently cut the senior debt ratings of Mitsubishi Bank, Sumitomo Bank, and Bank of Tokyo. To make matters still worse, the National Land Agency's latest figures show that prices for commercial real estate in Tokyo fell by 18% in 1993, with no pickup expected this year. So more hard times surely are ahead for the more vulnerable banks. But at least Japan is finally developing a strategy to resuscitate its banking system.