Abe's Plea to Cut Cross-Holdings Goes Ignored by Kyoto Bankby and
Lender says shares in clients provide attractive dividends
Cross-holdings don't necessarily damage governance: Doi
As Prime Minister Shinzo Abe urges Japanese banks to reduce their stakes in client companies, at least one lender isn’t playing ball.
Bank of Kyoto Ltd. sees no need to sell stakes in customers such as Kyocera Corp., Nintendo Co. and Nidec Corp., the regional lender’s President Nobuhiro Doi said. The household names differ from the “typical stable shareholdings” of Japanese lenders because Bank of Kyoto invested in them when they were startups and has supported them ever since, Doi, 59, said in an interview this month. The holdings also generate attractive dividends, especially compared with the low returns from lending in Japan, he said.
Doi’s stance puts him at odds with the nation’s biggest banks, which pledged in November to sell holdings that they can’t justify for reasons other than pure investment. Abe wants companies to reduce shares in each other to improve governance and limit their exposure to market swings like this year’s global rout. Lenders including Mitsubishi UFJ Financial Group Inc.may sell 5.6 trillion yen ($47 billion) in equity stakes by March 2019, Bloomberg Intelligence analyst Francis Chan estimates.
Abe’s administration is trying to change a business culture in which companies rely on lenders as friendly shareholders to ensure financing, fend off takeover threats and keep more demanding investors at bay. For Bank of Kyoto, the relationships it has built with its large corporate customers allow it to discuss matters that are important to shareholders, according to Doi.
“These companies are based in Kyoto, just like we are,” Doi said at the lender’s Tokyo branch. “We can easily meet with the management, and we tell each other the things that need to be said.”
The bank is the largest lender by assets in Kyoto prefecture, an industrial center in western Japan and a magnet for tourists to the nation’s ancient capital.
Bank of Kyoto’s shareholdings earned a dividend yield of 3.39 percent in the year ended March 2015, according to its financial statements. That’s almost three times the 1.23 percent it made in net interest from loans in Japan’s low interest-rate environment.
“There’s no other investment destination where we could sell our shareholdings and make a better return,” said Doi.
The lender’s return on common equity, a measure of how efficiently it uses shareholder funds, is 3.54 percent, less than the 6.37 percent average among its peers in the Topix Banks Index, data compiled by Bloomberg show.
“Given the limited opportunities to invest in securities, they’ve done well to build a portfolio of low-cost, high-yield stocks,” said Takashi Miura, a Tokyo-based analyst at Credit Suisse Group AG who has a neutral rating on the regional bank. “But you can’t forget the impact that the stocks they hold in other Kyoto businesses has in terms of their own share price.”
Shares of Kyoto Bank have declined 3.3 percent in the past year, compared with a 2.7 percent drop in the Topix Banks Index. The company is the fifth-largest holder of Nidec and Nintendo, with stakes of 4.16 percent and 4.15 percent respectively, according to data compiled by Bloomberg. The bank holds 3.82 percent of Kyocera, the data show.
Despite the financial regulator’s concerns that shareholdings expose banks to price volatility, Doi said the Nikkei 225 Stock Average would have to fall to 5,000 before paper profits would evaporate. The gauge gained 1.7 percent to 17,001.11 as of 1:01 p.m. in Tokyo, paring its loss this year to 11 percent.
While equity holdings made up 179.5 billion yen of the book value of Kyoto Bank’s 2.7 trillion yen securities portfolio as of March 2015, they generated 424.8 billion yen of the total 481.5 billion yen in unrealized gains.
Doi also said that as a shareholder in its bigger clients, Kyoto Bank has gained access to business from thousands of their employees.
“They partner with us because we’re a major shareholder,” he said. “The result of this is retail business such as home loans.”