Japan Banks Funding Drive Strains Family Ties

Tokyo, February 27: | Updated: Feb 28 2003, 05:30am hrs
Even the closest families can feel a strain on their relationship when money is tight. Japans biggest banking group, Mizuho Holdings, is finding that out as it goes about raising a massive $7.3 billion in funds from its Group firms to boost capital levels that have been left looking thin by a government crackdown on bad loans.

Reflecting the cosy connections between the corporate and financial worlds that fed Japans rapid post-war growth, many firms are set to dig deep and loyally buy preferred shares in the banking Group, the worlds biggest by assets. But others appear more reluctant, showing that those ties are weakening as Japans economic slump enters its second decade and raising some doubts over whether Japans struggling banks can raise enough capital by next months fiscal year-end.

Mizuho is seeking to raise one trillion yen ($8.54 billion)in capital before March book-closings to cover nearly two trillion yen of losses forecast for the year both a record for a Japanese firm. It plans to raise 850 billion yen in preferred shares from domestic clients and 150 billion yen from foreign investors. This may be the last time banks raise funds this way (through preferred shares), said Reiko Toritani, senior managing director at Fitch Ratings.

After such capital increases, it would be difficult to find investors the next time, unless banks boost profits and strengthen their financial standing...It is questionable if banks can do that immediately.

Banks are being forced into action by stricter standards on capital and loan classification that were forced through last year by Financial Services Minister Heizo Takenaka to cries of protest from bank executives. At a conservative estimate, the top banks have about 24 trillion yen in bad loans, and the new standards together with tumbling stock prices have raised the risk of their capital falling below globally acceptable levels.

But many of their corporate clients are also struggling to make ends meet in a stagnant economy stuck in deflation. They could incur the wrath of shareholders if they accept a banks funding request despite their own difficulties.

Two other major banks, Sumitomo Mitsui Banking Corp and Mitsubishi Tokyo Financial Group, have also launched funding drives but on a much smaller scale than Mizuhos.

What makes analysts nervous is how they plan to cover the added cost of issuing preferred shares, which carry higher coupons than common ones, as business conditions remain weak.

The Financial Services Agency, as part of the government drive to resolve the decade-long bad loan problem in two to three years, is scrutinising how banks raise cash, focusing on whether business ties are excessively, and perhaps illegally, exploited.

Mizuho is expected to report to the FSA in the next few days on its funding plan to show it is following the guidelines.

Concerns that Mizuho may not achieve the target helped send Mizuho shares to a seven-week low earlier on Thursday. It closed up 3.0 per cent at 103,000 yen after falling as lowas 974,000 yen, a tad above its record low of 952,000.

Some of Mizuhos top clients have expressed support for the funding campaign, hoping to fortify their ties. We decided to respond to Mizuhos request and plan to extend 10 billion yen, said a spokesman at Tokyo Electric Power Co, the countrys largest electric power firm.

Mizuho is our core financial partner and this move will help strengthen business relationships.