Asia Times: EDITORIAL Bank-merger mania: And then there were five?



	August 26, 1999	atimes.com

Japan

EDITORIAL
Bank-merger mania: And then there were five?

The reduction of the number of Japanese ''city banks'' to five (give or take one) internationally competitive big players appears to be the officially unspoken, but not exactly hidden goal of the Ministry of Finance and Financial Reconstruction Commission chairman Hakuo Yanagisawa. Coyly claiming that the planned merger of Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank to form the world's largest financial group with nearly $1.3 trillion in assets was conducted without any influence of financial authorities, he nonetheless conceded that, ''I have been expecting to see the emergence of Japanese financial players that can compete in the global financial market. This [alliance] exactly fits my expectations.''

So, what's next? Sanwa and Sakura banks are reportedly talking merger as - more guardedly - are Bank of Tokyo-Mitsubishi and Sumitomo Bank, perhaps with Nomura Securities joining the former and Daiwa Securities the latter potential alliance.

Whether or not, or to what extent, all this makes sense, is another issue. Breaking into the global phalanx of financial groups composed of the likes of current number one, Deutsche Bank, number two, Citigroup's Citibank unit, or United Bank of Switzerland (UBS) is not merely a matter of size, but of global reach, brand name, advanced financial and information technology, and, of course, financial health and profitability. As of now, the IBJ/Fuji/DKB alliance has little or none of that, though DKB was world number one for a while back in the heydays of the bubble economy. The most immediate concerns regarding the ''megabank'' (the Japanese media's favorite term for the alliance) have to be its financial condition and international-standard banking expertise.

For example, rival Bank of Tokyo-Mitsubishi's net business profit at the end of March was 600 billion yen, with 69 trillion yen in total assets. The total of the three banks' net business profit for the same period was only 500 billion yen, with 141 trillion yen in total assets. And in international comparison, even Tokyo-Mitsubishi's profit figures look anemic. Moreover, to recapitalize, make provisions for and write off bad loans (the aggregate amount of the three banks' risk-controlled assets is estimated to be 5.5 trillion yen), the megabank accepted a combined 2.8 trillion in public money this spring - a sum that won't be easy to build down with such low profits and that will be a millstone around its neck when it comes to investing in state-of-the-art technology and internationally experienced manpower.

The new megabank's structure and international savvy are as problematical as its financial health. IBJ is a long-term credit bank, the other two are retail banks struggling to keep up with Bank of Tokyo-Mitsubishi and Sumitomo Bank in that field. At first sight, that may seem like a good match of complementary capabilities. But keep in mind that Japan's other two long-term credit banks - Long-Term Credit Bank and Nippon Credit Bank - have already failed and been nationalized. Their international operations were a shambles; IBJ's aren't in great shape either, though domestically it had been in better condition than its failed competitors. But what will count in the future is investment banking expertise in the international arena. What will count for as much is ability to provide financial services to an ever more demanding international clientele - a field in which neither Fuji nor DKB have excelled even domestically.

Those negatives are real enough. Still, there's a nagging doubt in our mind that we may have missed something. It's hardly ever a brilliant idea to second-guess markets and go with analytical vigor and intellectual hubris against market judgement - and that judgement is: IBJ/Fuji/DKB up nearly 50% on the Tokyo Stock Exchange since the first August 19 report on the merger plans. Clearly, TSE investors - foreigners and Japanese alike - have so far given a resounding thumbs-up to the new venture.

Let's try this for a tack on why.

Troubled or not, Japan's economy remains the world's second largest. Troubled or not, so does the country's financial system. Add to that the enormous amount of some $12 trillion dollars in private savings, and surely there is the dramatic potential there for good money to be made. That potential - no matter how difficult the IBJ/Fuji/DKB may prove to be - has been significantly enhanced by those guys giving it their best shot. Of all the talked about or enacted Japanese reform measures of the past two years, the Tokyo Big Bang financial markets liberalization stands out as the only proven success. That big city banks are now aggressively responding to the challenge of liberalization and are readying themselves to jump into the global pond seems to us a whole lot better idea than watching from the rim and worrying about getting wet. They'll swim or they'll sink. On balance - like the markets - we'd bet on the former.

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