Shinsei Bank: Cappuccino, Mortgages, and an IPO?

Its turnaround is so successful it may go public, and competitors are jittery

In Tokyo, these are tough times to be a banker. Few banks are making money, and their stocks have dropped almost 30% since late September. The government is contemplating yet another reform plan. Before he does anything, though, Prime Minister Junichiro Koizumi would be wise to sit down with Masamoto Yashiro, president of Shinsei Bank. That's because this ex-chief of Citibank Japan is pulling off a most improbable bank-salvage act.

Shinsei is the reborn Long-Term Credit Bank of Japan, which collapsed in 1998, thanks to a mountain of dud loans and a savage run on its stock. LTCB never operated much like a business: It sold no-frills debenture notes to depositors while providing low-margin corporate loans, and its branches had all the charm of a Soviet-era Russian post office. The government seized LTCB, absorbed $37 billion in bad loans from its books, and, over the loud protests of much of the Tokyo establishment, sold it two years later to a consortium of Western financial firms led by New York-based Ripplewood Holdings LLC.

Since then, Yashiro and his international team of mostly ex-Citibank execs have upended just about everything at the bank. They overhauled an archaic information-technology system, rolled out a menu of financial products for retail customers, and started to transform Shinsei from a low-profit industrial lender into a top-flight commercial bank. But when Yashiro started calling in loans to deadbeat borrowers, such as the now-defunct Sogo department-store chain, relations with the government grew tense, and the Japanese press attacked. Yashiro couldn't care less: "I don't like to fail," he says with a grin. "They can call me anything they like."

That kind of in-your-face approach is rare in Japan, but the 73-year-old Yashiro is in a hurry. Shinsei has tentative plans to launch an initial public offering by the end of next year, so that its backers, including Ripplewood, Mellon Bank, and GE Capital, can cash out some or all of their chips. The IPO could get a warm welcome. As other banks bleed cash, Shinsei earned $501 million in the year ended Mar. 31, although that was down sharply from the $730 million it earned the year before because the bank spent heavily on new lines of business. In the current fiscal year, it's expecting a $512 million profit. Says Liberal Democratic Party Diet member Yasuhisa Shiozaki: "There is a kind of jealousy directed at Shinsei, because they can do things others can't."

There's lots to be jealous of. Yashiro's new retail strategy has pulled in about $8 billion in deposits since mid-2001. To increase foot traffic, Shinsei subleased space at some of its 27 branches to Starbucks and Yahoo! Japan Internet cafes. And with interest rates at all-time lows in Japan, Shinsei has unveiled a new product that allows homeowners to pay off big chunks of their mortgages without incurring penalties, unusual in Japan. But Shinsei's most important goal is to entice its corporate borrowers to pay fees for investment-banking advice and services, debt-securitization deals, and sophisticated hedging products. Shinsei now gets about one-third of its earnings from such services.

If Prime Minister Koizumi posed the question, Yashiro would tell him that future buyers of failing banks should be allowed a closer look at the quality of the balance sheet and more freedom to call in loans and cut off borrowers. Unfortunately, Yashiro doesn't have the ear of the prime minister these days. Expect many more plans to fix the banks.

By Brian Bremner in Tokyo

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