The Japanese Banker Who Can Say No
In 1997, Masamoto Yashiro was planning a well-deserved retirement in London after spending eight years running Citibank's successful retail banking operation in Japan. But Yashiro, 71, is not taking high tea or hanging around London art galleries. Instead he finds himself back in Tokyo, as the chief executive officer of money-center Shinsei Bank Ltd. A plum post? Only if one's idea of job satisfaction is being branded a "national enemy" by Japanese politicians. Yashiro's sin? Telling deadbeat corporate borrowers to get lost.
Hard-nosed banking is the norm in the West, but this is Japan. And Shinsei is no ordinary bank. It is the reincarnation of Long-Term Credit Bank of Japan Ltd., which collapsed in 1998 with nearly $40 billion in bad loans and was then nationalized to prevent a run on Tokyo money-center banks. It is now owned by a clutch of foreign investors, including Ripplewood Holdings, Mellon Bank, Paine Webber, and GE Capital.
When the government sold the bank to Ripplewood and company for $1.12 billion in March, it marked the first outright foreign takeover of a Japanese bank. That seemed like a huge step forward in Tokyo's campaign to import Western business practices and capital, a belated effort to drag Japan's banking industry out of the financial dark ages.
It still might be. But six months later, Yashiro and his management team of Western and Japanese commercial bankers face some daunting challenges. Despite official assurances, the loan book that Shinsei inherited from the government isn't all it was cracked up to be. Beyond that, there is the task of moving Shinsei away from its reliance on a low-margin corporate loan business and into more-profitable sectors like asset management for wealthy individuals and an array of investment banking services.
That essentially means building a retail banking operation and investment bank from scratch, though Yashiro is looking for alliances and acquisitions in insurance products and consumer finance. But Yashiro and his team have been distracted by enormous political pressure to cut Shinsei borrowers some slack. "I can make myself a very liked person by saying: `O.K., we'll forgive you, we love you,"' he says, but "then what happens to this bank?"
Hence Shinsei's controversial decision in July to pull out of a $6 billion debt forgiveness scheme it was putting together with other creditors for retail giant Sogo Corp. The withdrawal was nothing less than an act of survival. The provisioning costs of swallowing its share of the Sogo loan would have wiped out Shinsei's projected $180 million profits for the fiscal year ending in March. But the move triggered Japan's second biggest corporate failure in history--and earned Shinsei the enmity of the Japanese political Establishment. And fair or not, "it reinforced the image in Japan that they're really a foreign bank," says Standard & Poor's Corp. analyst Graeme D. Knowd. That's Yashiro's dilemma. His first allegiance is to Shinsei investors, but he's running a bank in a land where cutting off borrowers is considered bad form.
It wasn't supposed to be this tough. After all, the government had assumed about half of Shinsei's debt, leaving it with supposedly sound assets of $120 billion. The deal left the new Shinsei with a strong capital adequacy ratio of 13%, well above the globally mandated 8%, as well as cash for growth.
Yet in the first two months of operation, all sorts of brush fires broke out. One of Shinsei's borrowers, consumer-finance company Life Co., shocked bank officials by revealing a $1 billion negative net worth, double the previous estimate. Shinsei cut it off. It also pulled the plug on Dai-Ichi Hotel Ltd. after other banks backed out of a restructuring plan. When Shinsei opted to sell back its Sogo loan to the government, as it was entitled to do, the bank was savagely attacked in the Diet by the ruling Liberal Democratic Party.
"TOUGH SKIN." Yashiro has been willing to forgive debt for some companies. One rare example was a $138 million write-off for general contractor Hazama Corp. But companies without viable turnaround plans will be cast back into the government's court, regardless of bad publicity. "In theory, we were supposed to be buying appropriate assets," Yashiro says with a grin, "and I have a tough skin."
Yes, but can he build a profitable future for Shinsei? Yashiro, a fluent English speaker and law graduate from Kyoto University, is no slouch. After spending several years in the oil industry, he joined Citibank Japan in 1989, where he rose to chairman. Yashiro is credited with building up Citibank Japan's retail banking franchise. He was thus an obvious choice to run Shinsei.
And it's Yashiro's to run. Ripplewood and other investors have no direct say in day-to-day management, though they are on the lookout for ways to cross-promote their financial products via Shinsei. Yashiro has hired some 80 new employees, including a team of securitization specialists from Bear, Stearns & Co. He also recruited Brian F. Prince, formerly a top Asia specialist at Lehman Brothers Inc., as corporate executive officer, and former U.S. Federal Reserve Chairman Paul Volcker as an adviser.
Yashiro's goal is the same 120 to 160 basis-point return on assets that the best-managed banks in the West earn, versus 30 in Japan. To get there, he has beefed up Shinsei's consumer banking side by setting up telephone banking and offering mutual funds from Fidelity Investments and Goldman, Sachs & Co. And he is laying plans for an online banking service in 2001.
On the investment banking side, Prince thinks Shinsei can leverage its lending relationship with 450 corporate clients by offering to repackage and sell their assets and by helping them hedge against price shocks and currency moves. With Japan moving to consolidated earnings reports, which will show losses at subsidiaries and mark stocks and real estate to market, companies are desperate for these kinds of services. "It's the No. 1 priority of everyone I talk to," Prince says.
Of course, Shinsei is a long way from taking on the major merger and acquisition advisers. It did snag the lead role for a new, $45 million syndicated loan to Dainippon Ink & Chemicals Inc., and it is close to nailing down its first securitization deal. But it has stiff local competition. For instance, Mizuho Holdings Inc., the three-way alliance among Industrial Bank of Japan, Fuji Bank, and Dai-Ichi Kangyo, is using its $1.2 trillion in assets to target many of the same niches as Shinsei.
Still, Shinsei seems to have the resources and talent to reemerge as a real force in Japanese banking. Yashiro, who expects to take the bank public down the road, even thinks he can deliver a profit for the government on its $2.3 billion worth of preferred shares. Of course, it would help if politicians stopped going into fits every time Shinsei makes a tough call and pulls the plug on an undeserving borrower.