Tokyo Mitsubishi Bank: Big, Yes. Bad, No

One is the financial cornerstone for the sprawling Mitsubishi keiretsu. The other boasts a lucrative foreign exchange business and clout aplenty with Japan's powerful Finance Ministry. Together, they will become the world's largest bank by a long shot. But will the megamerger of Mitsubishi Bank Ltd. and Bank of Tokyo Ltd., which was announced in Tokyo on Mar. 28, trigger defensive tieups among suddenly frantic bankers from Manhattan to Frankfurt?

Don't bet on it. True, the new Tokyo Mitsubishi Bank, its proposed name, will cast a long shadow. Its asset base of roughly $810 billion would be larger than that of Citibank and Credit Lyonnais combined. Bank of Tokyo's 362 outposts around the globe will dovetail nicely with Mitsubishi's more domestically focused 346-branch retail network and $416 billion deposit base. Together, the banks will have less bad debt as a proportion of total loans than any of their nine biggest competitors, reckons Merrill Lynch & Co.

THROUGH THE MAZE. But global banking isn't financial sumo, where size means power. Rather than presenting the international industry with a fearsome new threat, the merger--set to be completed by April, 1996--represents an effort to play catch-up. As Japan's byzantine financial rules that separate lending and securities businesses ease, Mitsubishi and Bank of Tokyo see an opening. They want to create the nation's first full-service bank, offering everything from no-frills corporate loans and fund-management services to interest-rate swaps--a mix that many of their foreign rivals are already in a position to offer global clients.

Nor does the merger directly address the fundamental problems bedeviling Japan's banking sector, which needs even more consolidation to weed out weak players. Loan demand is stagnant, and the financial crash of the early 1990s has left roughly $300 billion in bad and restructured loans on banks' books. Japanese lenders' average annual return on equity over the past five years is only 4.7%, less than half what U.S. banks make. But if healthier outfits such as Sanwa Bank, Fuji Bank, Industrial Bank of Japan, and others start pairing off to compete with the new behemoth, a wave of takeovers of weaker banks may ensue.

There's no doubt that Tokyo Mitsubishi will be greater than the sum of its parts. Bank of Tokyo enjoys profitable businesses in foreign exchange, derivatives trading, and overseas banking, but a weak domestic base of 37 branches had dimmed its outlook. And the bank no longer enjoys the monopoly it once held on foreign exchange and trade lending for exporters. Mitsubishi's deep pockets will help Bank of Tokyo expand its presence at home and in derivatives trading.

Mitsubishi, meanwhile, will gain political capital at the

Finance Ministry, thanks to Bank of Tokyo Chairman Toyoo Gyohten, 64, the globally respected former vice-minister of international finance. While Mitsubishi Bank President Tsuneo Wakai will become chairman, Gyohten is expected to keep his ties to the new bank. That matters, because the Finance Ministry has only gradually allowed commercial banks to ease into the securities business--a market they desperately want to tap. Gyohten's connections could come in handy, now that Japanese bureaucrats are slowly beginning to let banks branch out into securities trading and underwriting. "We have been on the right track, but it's a slow-moving train," says one Mitsubishi source.

In the U.S., the merged bank stands to inherit a sizable presence in the California market. If U.S. regulators allow Bank of Tokyo's Union Bank and Mitsubishi's Bank of California to merge, the new entity's $25 billion in assets would surpass those of First Interstate Bank of California. But local analysts don't expect Tokyo Mitsubishi to blow everyone else out of the water in California or anywhere else in America. "Relationship banking is the name of the game," says Judah Kraushaar, an analyst at Merrill Lynch in New York. "Does the new name really get them in the door?"

Even if it doesn't, the combination ensures that Mitsubishi and Bank of Tokyo will pull even further ahead of the pack at home. "This will be a flagship competitor," figures Christopher T. Mahoney, managing director of global banking at Moody's Investors Service. At least American and European rivals can take comfort that Tokyo Mitsubishi will be the flagship of a very uncertain fleet.

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