Japan's Biggest Banks Unveil Targets for Cutting Shareholdings

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  • Firmest commitment to boost governance, reduce market exposure
  • Mitsubishi UFJ and Mizuho beat profit estimates, SMFG misses

Japan’s biggest banks unveiled targets for cutting their shares in client companies, their firmest commitment yet to improve corporate governance and reduce their exposure to stock-market gyrations.

Mizuho Financial Group Inc. will lower its so-called cross-shareholdings by 40 percent in coming years, it said in a statement Friday. Sumitomo Mitsui Financial Group Inc. said it plans to reduce its ratio of stock holdings to common equity Tier 1 capital by half within five years. Mitsubishi UFJ Financial Group Inc. said it will trim its holdings to 10 percent of Tier 1 capital.

The Tokyo-based banks, which accumulated the shares to cement relationships with clients, pledged earlier this year to unwind them in accordance with Prime Minister Shinzo Abe’s new corporate governance code that seeks to break cozy ties between companies. Mizuho and Mitsubishi UFJ posted second-quarter profit on Friday that beat analysts’ estimates as gains from the sale of equity holdings made up for declines in lending income and bond trading, while Sumitomo Mitsui’s results missed projections.

“Having a publicly stated target is definitely more convincing than in the past,” said Shunsaku Sato, senior credit officer at Moody’s Investors Service in Tokyo. “But it’s premature to reflect on the benefits until we see what they do with the freed capital.”

One option is to increase returns for investors. Mitsubishi UFJ, the nation’s biggest bank, said Friday that it plans to buy back as much as 100 billion yen ($815 million) of its shares, its third such repurchase in the past year.

Withstand Shocks

The combined market value of cross-shareholdings at the three lenders was more than 14 trillion yen as of June 30, according to Rie Nishihara, a senior analyst at Mizuho Securities Co. in Tokyo. Efforts to unwind these would be “welcomed by markets,” she wrote in a Nov. 9 report.

Mitsubishi UFJ’s cross-shareholdings are equivalent to about 19 percent of Tier 1 capital, President Nobuyuki Hirano said at a briefing in Tokyo. Stress tests showed the 10 percent target would enable the bank to maintain a sufficient capital ratio in a sharp stock-market selloff, according to Hirano. “We wouldn’t be in the red even in another event like the Lehman shock,” he said.

Sumitomo Mitsui, the nation’s second-largest lender by market value, currently owns stocks with a book value of 1.8 trillion yen, it said in a statement. They were equivalent to 28 percent of common equity Tier 1 capital as of Sept. 30, according to the bank.

“The level we need to be aiming for is under 10 percent, like banks in the U.S. and the U.K.,” Sumitomo Mitsui President Koichi Miyata said. “Our direction for now is to get down to about 14 percent in about the next five years.”

Beat Estimates

Mizuho had domestic shareholdings with a book value of about 2 trillion yen as of June, it reported in September. By March 2017, the bank aims to be as much as halfway toward its goal for the 40 percent reduction. It seeks to achieve 70 percent of the target by March 2019.

Mizuho’s net income unexpectedly climbed 13 percent from a year earlier to 226.2 billion yen in the three months ended Sept. 30, according to Bloomberg calculations derived from six-month earnings reported by the bank. First-half profit was 384.2 billion yen, putting it on course to achieve its full-year goal of 630 billion yen.

Mitsubishi UFJ’s second-quarter profit fell 4.9 percent to 321.5 billion yen, beating analysts’ projections for 268.1 billion yen. First-half earnings gained 3.6 percent to 599.3 billion yen, meaning it has achieved 63 percent of its 950 billion yen full-year target.

Sumitomo Mitsui’s quarterly profit fell 52 percent to 120.2 billion yen as it posted a 55 billion yen writedown on an investment in Indonesian lender PT Bank Tabungan Pensiunan Nasional. Losses on stock holdings as well as lower income from bond trading and lending also contributed to the decrease, according to Bloomberg calculations. First-half profit declined 19 percent to 388.1 billion yen.

Asia Slowdown

Shares of the three banks have climbed at least 15 percent this year after declining in 2014. Mitsubishi UFJ closed 1.5 percent higher before the results were released, while Mizuho slipped 0.1 percent and Sumitomo Mitsui was little changed.

Lending income is being hampered by weakening demand for loans from Asia as growth slows in economies from Thailand to Malaysia. The Japanese banks have been expanding in the region in search of higher returns as near record-low interest rates constrain lending profitability at home.

Loan growth at overseas branches of Japan’s so-called city banks, which include the three lenders, slowed to 6.8 percent in the first eight months of 2015 from 25 percent for all of 2014, according to Bank of Japan data.