SMFG’s woes bad sign for banks

Contrary to spin, megabanks creaking under weight of bad loans, bleeding stock portfolios

by Finbarr Flynn and Takako Taniguchi

Bloomberg

Sumitomo Mitsui Financial Group Inc.’s unexpected $3.9 billion loss and plans to seek capital are adding to evidence that Japan’s biggest banks may struggle to weather the deepening recession.

The Tokyo-based lender, the second-largest by market value, said Thursday it may raise as much as ¥800 billion to restore a balance sheet weakened by bad loans and losses on investments, including Barclays PLC. The news came a day after Moody’s Investors Service cut the credit ratings of Mizuho Financial Group Inc. and said the bank may need more cash.

Sumitomo Mitsui, Mizuho and Mitsubishi UFJ Financial Group Inc. plowed a combined $11 billion into ailing Western rivals, fueling speculation that they would seize on the global credit crisis to expand abroad. The banks are now retrenching under the weight of swelling investment losses and a recession that’s pushed bankruptcies to a six-year high.

“It is now reality-check time for those who thought the Japanese banking system had weathered the storm and was going to be a bastion of strength in the global banking system,” said Kirby Daley, a strategist at Newedge Group in Hong Kong. “Mountains of bad loans, topped with cross-shareholdings and stock portfolios which are in the red, in the current environment makes for a very bad mix.”

The bank, which wrote down ¥53.2 billion on its investment in Barclays, had in October forecast net income of ¥180 billion. The median of six analyst estimates compiled by Bloomberg in the past month was for a ¥47.6 billion profit. Earnings a year earlier totaled ¥461.5 billion.

Bad-loan costs at Sumitomo Mitsui reached about ¥760 billion, said Takeshi Kunibe, a member of the company’s board. The bank also reduced deferred tax assets by about 30 percent to ¥670 billion and will book ¥220 billion in losses on stocks, he said.

“Japanese banks will have to do large-scale capital raisings in the near future,” said Makoto Haga, president of Wing Asset Management Co., a Tokyo-based hedge fund. “It was a mistake to jump into investments in overseas banks — now they’re hurting existing shareholders by issuing new stock.”

Mitsubishi UFJ, which has raised more than $13 billion in capital since November, poured $9 billion into Morgan Stanley last year. Mizuho, which has raised $4.4 billion in capital since December, invested $1.2 billion in Merrill Lynch & Co. in 2008 before it foundered and was bought by Bank of America Corp.

Sumitomo Mitsui invested £500 million ($737 million) in Barclays in July at a price of 296 pence a share. The London-based bank’s stock slumped 50 percent to 148 pence between then and the end of fiscal 2008 on March 31.

It will cut its dividend 25 percent to ¥90 a share, according to Thursday’s statement. The sale of new stock may dilute the value of existing shares in Sumitomo Mitsui by 30 percent, the company said.

Sumitomo Mitsui’s stock fell 48 percent during the fiscal year, the sixth-biggest drop on the bank index, which fell 39 percent. The 225-issue Nikkei average dropped 35 percent during the same period.

“Japanese banks’ shares won’t look attractive until they sort out the ‘bottleneck’ issue of cross-shareholdings,” said Shinichi Iimura, a Tokyo-based analyst at Merrill Lynch & Co.

Sumitomo Mitsui lends more to smaller companies than its peers and faces greater risk from rising defaults as the recession deepens, according to Macquarie Group Ltd. Bankruptcies among listed companies reached 33 last year, a postwar record, according to Tokyo Shoko Research Ltd.

Mizuho has reduced its full-year earnings forecast twice amid a deepening recession and a record slump in exports. It most recently flagged a profit of ¥100 billion.

Mitsubishi UFJ has also cut its annual net income forecast twice, most recently to ¥50 billion.