Japanese Banks Learn to Brawl

The Sumitomo Mitsui vs. Mitsubishi Tokyo smackdown for poorly performing No. 3 bank UFJ says it all about the new order of things

By Chester Dawson

That explosion you hear is the sound of a fierce clash pitting two Japanese lenders against one another for the right to become the country's biggest bank. But it comes eight long years after authorities in Tokyo prepared the powder. On Aug. 24, Sumitomo Mitsui Financial Group launched a $30 billion hostile bid for Japan's No. 3 bank, besting an outstanding offer made by Mitsubishi Tokyo Financial Group and heating up an epic struggle between financial titans.

The no-holds-barred bidding war among once protocol-obsessed bankers is the clearest sign yet that the once-monolithic Japan Inc. is no more. And it's a direct -- if delayed -- result of a series of key reforms dating from the 1990s.

As their unwieldy names suggest, the two banks at the center of this drama are themselves products of a series of consolidations that signaled the unwinding of the close-knit, cross-shareholding empires that for years bound banks to affiliated industrial groups. But the impetus behind it all dates back to legislation that was phased in slowly after being unveiled in 1996.


  It set the stage for merger mania by removing rigid barriers that separated -- and protected -- banks from other financial firms, such as fund managers and insurers. Suddenly, size mattered. But even as bankers pondered partnerships, Japan's cautious banking community, long known for its herd mentality, was reluctant to allow long-repressed capitalist animal spirits to prowl freely.

Until now. Tokyo Mitsubishi Chief Executive Officer Nobuo Kuroyanagi and Sumitomo Mitsui head Yoshifumi Nishikawa are locked in an all-out fight that has each CEO gathering support among powerbrokers in the gray corridors of Otemachi, Tokyo's chief high-finance district. The object of these two top Japanese bankers' desire, UFJ Holdings, is another product of a recent merger.

Yet combining a trio of large, weak banks hasn't produced a stronger giant. In fact, UFJ can hardly be considered much of a prize. Not only does it have more nonperforming loans on its books than any other lender but it also faces charges for allegedly destroying documents detailing its bad loan woes.

WE'RE NO. 1.

  Why are Mitsubishi Tokyo and Sumitomo Mitsui so eager to buy such a problematic bank? Bragging rights. Officially, both contenders tell their shareholders that they're seeking to take advantage of economies of scale from a much larger asset base and access to favored clients in an expanded loan portfolio. At the same time, to woo UFJ's senior management, Kuroyanagi and Nishikawa are pledging a "merger of equals" and say that cost-cutting will be pursued prudently -- probably by attrition -- to protect jobs.

What's really going on is that the strongest banks, now flush with profits, are flexing their muscles after a long period of retrenchment. For them, higher stock prices, a stronger economy, and improved consumer confidence have translated into perkier stock portfolios, fewer bad loans, and increased demand for financing following Japan's "lost decade" in the 1990s.

Mitsubishi-Tokyo made its initial offer for UFJ to reclaim for Japan the title of "world's biggest bank" and cement its status at home as the country's preeminent lender. But Sumitomo Mitsui has said: "Not so fast."


  Whichever bank prevails in the end, it's certain to speed up the disposal of Japan's remaining nonperforming loans and put the country's financial industry on a firmer footing. For years, too many banks have chased too few yen, which gave the advantage to corporate borrowers that played lenders off one another.

Today's Darwinian reality is bad news for troubled companies such as supermarket chain Daiei, which has relied on handouts from friendly banks such as UFJ to prolong its survival. But it's a welcome move for investors and the Japanese economy, which is finally weaning itself of some of its worst habits.

Dawson is International Finance editor for BusinessWeek in New York

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