Japan Cross-Shareholdings May Unwind Under New Governance Code

New corp. governance code taking effect today will force cos. to disclose policies on cross-shareholdings and exercise of voting rights.

BOFA strategist Kenji Abe (May 29)

  • Corporations hold ~20% of Japanese equities; unlikely to see quick, sharp reduction in such policy holdings, as it isn’t required by new code
  • If code forces stricter voting right guidelines, rationale for cross-shareholdings may fade, leading to l-t unwinding
  • Mkt impact mitigated by share repurchases; code may be incentive to mgmt to boost efficiency, be more attentive to holders
  • Asatsu-DK, Nintendo, Fukuyama Transporting, Morinaga Milk, Seino Holdings, Sumitomo Bakelite among cos with low 5-yr avg. ROE, high corporation and/or financial institution ownership

NOMURA strategist Hisao Matsuura (May 27)

  • Japan’s end-FY13 cross-shareholding ratio 11.0%, lowest since at least FY90; higher than equivalent ratios in U.S. and U.K.
  • Unwinding of cross-shareholdings to have 2 main impacts:
    • Mkt will approve sales of shrs for which holders lack detailed explanations of objectives and rationale
    • Stks being sold may see short shr price corrections
  • Stks with large value of listed equity holdings relative to total assets: Digital Garage (125.4%), Toyota Industries (55.7%), Obic (35.8%), Jafco (30.2%), Fujiya (28.9%), Kumiai Chemical (27.6%), Toei (25.8%), Relo Holdings (25.6%), Japan Petroleum Exploration (25.1%), Yamaha Corp. (22.8%), Fuji Electric (22.8%), Harmonic Drive (21.8%), Sakata INX (21.3%), Keisei Electric (20%)
  • Stks with high ownership by listed cos.: Metawater (75%), Japan Drilling (66%), Jamco (62%), NS United Kaiun (60%), T-Gaia (59%), Sumco (56%), Imperial Hotel (55%), Toyota Boshoku (55%), Riken Vitamin (53%), Kandenko (52%), Orient Corp. (51%), Osaka Titanium (50%), Nakayama Steel (50%)

SMBC NIKKO strategist Ryota Sakagami (May 19)

  • Sales of cross-holdings may reach 34.1t yen; total falls to 27.6t yen ex-holdings between cos. in same sector, to 15.9t yen if bank holdings also excluded
  • Some volume to be absorbed through buybacks; some observers also see Banks’ Shareholdings Purchase Corp. (BSPC) stepping in to prevent deterioration of stk supply-demand
  • Some cos. may gain “large amounts of cash” by selling cross-holdings
  • Stks with high levels of shr holdings relative to own mkt caps: Bank of Kyoto (116.7%), Toda (104%), Shiga Bank (89%), Sumitomo Warehouse (72.4%), Japan Petroleum Exploration (67.2%), Mizuho (65%), Obayashi (64.9%), Hyakujushi Bank (57.9%), Resona (52.8%), Okumura (50%)

BNP PARIBAS banks analyst Toyoki Sameshima (May 1)

  • Japanese banks held stks valued at 21t yen as of March 2014, equal to 44% of shareholder equity, 2% of total assets
  • BSPC spent only 1.4t yen of 20t yen stk purchase capacity since it was established in Jan. 2002; has ~18.6t yen to spend by end-March 2017 (deadline can be extended)
  • “Mere existence” of BSPC’s budget not enought to cause action; probably necessary to abolish or reduce capital gains taxes to encourage banks and corporations to sell stks
  • Mkt values of stks held by megabanks: MUFG 4.9t yen, SMFG 3.2t yen, Mizuho 3.5t yen; BNP ests. 20% reduction would improve CET1 ratios 25bp, 50% cut would provide boost of 63-68bp

S&P (report dated May 19)

  • Unwinding of cross-shareholdings “about to enter a new phase”
  • Will reduce risk assets for banks and insurance cos., which may be positive factor in S&P assessment of capitalization
  • For corporations, effect on credit quality will depend on factors incl. use of proceeds, impact on financials, impact on relationships with lenders

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