Bank merger to blur old zaibatsu lines Sumitomo, Mitsui groups draw closer, push competition to do same
BY MAKOTO SATO Staff writer
The decision by Sumitomo Bank and Sakura Bank to cross once-sacred lines dividing corporate groups and merge in April 2002 resonated like a shot from a starting gun as companies began feeling increased pressure to cast old loyalties aside and find strong partners to ally with.
The union of Sumitomo - the fourth-largest commercial bank in Japan and the main bank of the Sumitomo group - and Sakura - the sixth-largest in Japan and the main bank of the Mitsui group - will create the world's second-largest bank. But perhaps the more profound change of this agreement is that rivals in a slew of key industries, from trading houses to automakers, will soon share the same main bank.
Sumitomo and Mitsui have been part of Japan's economy since the 17th century, forming into powerful corporate groups known as zaibatsu in the late 19th century. Though the zaibatsu were officially abolished after World War II, many major companies have tended to keep their zaibatsu affiliations.
Analysts say news of the bank merger is likely to touch off a furious round of realignment among businesses as the ramifications of the Sakura-Sumitomo move begin to sink in.
The merger "will play a positive role in industrial reorganization," said Katsusada Hirose, administrative vice minister for international trade and industry. He said he expects the bank merger to expedite mergers and alliances within the two corporate groups.
The new bank will have a strong retail network, combining Sumitomo's strengths in the Kansai area - Nara, Kyoto and Osaka - with Sakura's strengths in the Tokyo metropolitan and Kobe areas.
Sakura and Sumitomo banks announced they plan to slash their joint work force of 31,000 by some 9,300 in five years. The banks say they will reduce a total of 6,300 personnel by March 2002 by moving up by one year their restructuring plans, which they submitted to the Financial Reconstruction Commission this March. After the merger, the new bank will cut an additional 3,000 workers by March 2004.
In comparison, the megabank announced by Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan plans to cut 6,000 jobs in five years.
"Under global megacompetition, we need cooperation beyond zaibatsu groupings to be competitive," Akishige Okada, president of Sakura Bank, said at a press conference announcing the merger last week.
Japan will have gone from 10 commercial banks in October 1997 to five once the mergers go through. Hokkaido Takushoku Bank collapsed in 1997, Daiwa Bank decided to become a regional bank last year and four other commercial banks have since decided to merge into two entities. All three long-term credit banks have disappeared, and most trust banks are now allied with major bank groups. Analysts say the wave of realignment will likely move beyond the banking sector to securities and insurance.
The merger will create a bank with total assets of 98.7 trillion yen ($931.1 billion), trailing only the IBJ-DKB-Fuji bank, which would have 141 trillion yen. The Sumitomo-Sakura bank would have 3.8 trillion yen in nonperforming loans; the banks plan to reduce that amount to a total of 200 billion yen by March 2002.
The two banks also plan to:
-- begin cross-shareholding procedures in this fiscal year through March;
-- start personnel exchanges by next March in all business areas including retail, wholesale and securities;
-- integrate computer systems that manage deposits and loans;
-- enter Sumitomo into Sakura's plans to cooperate with convenience-store chain operator am/pm Japan Co. by installing automated teller machines in its stores and to establish a joint consumer loan company with Nippon Life Insurance Co.;
-- integrate in-house standards to assess assets and to decide which bad loans should be written off;
-- jointly develop loan products for small and midsize companies.
Both banks acknowledged many details need to be worked out, such as the name of the new bank, the board of directors and other technical matters.
Analysts still praised the plan. Seiji Otsuka, senior analyst of the banking sector in the Tokyo branch of Jardine Fleming Securities (Asia) Ltd., said the proposed merger indicates the Japanese financial Big Bang is entering its final stages.
"The integration of the three banks (DKB, Fuji and IBJ) is an attempt to create a comprehensive financial group," he said. "Bank of Tokyo-Mitsubishi seeks to operate globally; the alliance between Tokai Bank and Asahi Bank seeks to create a strong regional bank that holds several franchises; and the merger between Sumitomo and Sakura fills the gap in the retail sector."
The retail business has been the stronghold of both Sumitomo and Sakura. The new bank is likely to have about 2 trillion yen in retail loans and 11.4 trillion yen in housing mortgages, roughly equal to the level of the DKB-Fuji-IBJ bank.
Retail deposits at the Sumitomo-Sakura bank is likely to be 28 trillion yen, and its loans to small and midsize companies would be 27 trillion yen. The world's biggest bank, to be formed by Sumitomo and Sakura's three rivals, would have 33 trillion yen and 32 trillion yen, respectively.
Katsuhito Sasajima, senior banking analyst of Warburg Dillon Read (Japan) Ltd., said Sumitomo will expand its customer base from this merger, and Sakura will be able to retain the business of Mitsui group member companies, which have recently been straying from their longtime main bank. "Sumitomo can enhance its wholesale business by adding Sakura's customers to its base," he said. "Also, Sakura's recent venture with Fujitsu Ltd. for Internet banking could be quite attractive, considering that consumers seldom switch their Internet service provider."
Drastic cuts
Sasajima said the planned 30% reduction in personnel is unusual even in restructuring efforts by Western banks. "The restructuring plan does not include the consolidation of subsidiaries or affiliated companies," he added. "Restructuring efforts may expand."
The plan was appraised highly by the stock market. On Oct. 14, the day news of the merger appeared in the press, the stock price of both banks shot up.
Sakura Bank's stock rose 100 yen, or 11.11%, on the day to 1,000 yen; in the morning session there were no sell orders. Sumitomo Bank stock rose 170 yen, or 10.86%, on the same day to 1,735 yen. The next day Sakura's share price dropped back to 915 yen on short-term profit taking.
In a press conference last week, Sumitomo President Yoshifumi Nishikawa adamantly denied claims that the merger was about bailing Sakura out of trouble.
"I feel anger when I hear such irresponsible comments about Sakura Bank being in danger. This deal is certainly not about Sumitomo coming to the rescue," he said. Nishikawa said the merger helps both banks cope with the changes brought on by the financial Big Bang.
Nishikawa acknowledged that the plans of their rivals to form the world's biggest bank sped up the plans of Sakura and Sumitomo.
IBJ, DKB and Fuji chose to integrate through a holding company. Sumitomo and Sakura took the traditional route of merging into one entity. "To maximize effectiveness and improve efficiency, a merger is better than other styles of integration," Nishikawa said.
Sakura's Okada said: "The positive effect of a holding-company system can be achieved through an in-house company system."
Analysts say the merger may have been inevitable, considering the new rules in the financial sector brought about by deregulation. "To increase competitiveness in the global financial market, economies of scale and a variety of services are necessary," Otsuka of Jardine Fleming Securities said. "Rejecting a merger with one bank, even if the bank is a main bank of a different corporate group, is no longer logical in the Big Bang era."
He added: "The same structure can be applied to other sectors of the financial industry. Considering the potential for improvement in product development and enhancement in a company's financial base, a merger or comprehensive alliance is inevitable for nonbank financial companies. I think the next realignment will take place in the life-insurance sector."
Sasajima of Warburg Dillon Read also thinks the effect of the Big Bang is spreading from the banking sector to other parts of the financial industry. "Now the Big Bang is in the next stage," he said. "Realignment of the commercial banking sector has almost settled. Trust banks, securities and insurers have to decide what path to take."
But action among commercial banks is not quite finished, he believes. "Bank of Tokyo-Mitsubishi and Sanwa Bank have been potential winners of the Big Bang, but still hesitate to jump on the realignment bandwagon. Other top companies such as Nomura Securities Co. and Nippon Life Insurance are also keeping their distance from potential partners. I think the final shape of the banking sector will be formed by the end of the year, but realignment will go on for a while."