Shinsei to swing ax at ex-GE financing unit

by Finbarr Flynn and Takako Taniguchi

Bloomberg

Shinsei Bank Ltd. plans to cut “hundreds” of jobs at the consumer lending unit it bought from General Electric Co. last year as the industry contracts, the head of the division said Thursday.

Shinsei Financial Co., the renamed former GE subsidiary, will trim staff even after meeting a profit target of about ¥30 billion for the fiscal year that ended March 31, CEO Shota Umeda said in an interview. The unit aims to cut costs by ¥5 billion annually over the next three years, he said.

The deepening recession is fueling an increase in bad loans for consumer lenders, which have been declining since a 2006 crackdown by authorities forced them to repay borrowers billions of yen in overcharged interest.

Shinsei bought GE’s local consumer finance businesses in September for ¥580 billion in a move the bank itself called “contrarian,” as rivals, including Citigroup Inc., scaled back lending.

“The outlook for the consumer finance industry is dismal,” said Hironari Nozaki, an analyst at Nikko Citigroup Ltd. in Tokyo. “GE’s profit contribution to Shinsei may stand out in the next two to three years, but it’s still hard to know if provisions are enough to meet deteriorating loans.”

Shinsei Financial, which operates the consumer lending unit Lake, plans to cut its number of staffed branches by more than 80 percent this year, said Umeda, 45. The company was the No. 1 or No. 2 originator of new personal loans in Japan in the period since last June, he said.

“At the end of last year, we had about 42 manned branches,” he said. “We are going to bring that down to seven branches based in major cities by about June.”

Shinsei Bank CEO Masamoto Yashiro, 80, is trying to refocus on domestic lending after losses on overseas investments led his predecessor, Thierry Porte, to resign in November. The GE acquisition boosted Shinsei’s assets by ¥879 billion, including ¥647 billion in personal loans and ¥105 billion in mortgage loans.

Previous consumer-finance acquisitions didn’t immediately create profits for Shinsei. The lender had its first full-year loss in the 12 months through March 2007 after charges of ¥125.9 billion on investments in consumer credit companies Aplus Co. and Shinki Co.

Consumer lenders, which returned to profit last year after posting a combined ¥1.7 trillion loss in the year that ended on March 31, 2007, are struggling to remain profitable as the recession worsens and refund claims remain high.

In January 2006, the Supreme Court ruled that standard loan contracts at the time were illegally coercive. It invalidated agreements requiring borrowers to pay more than 20 percent interest.

In December 2006, legislators gave consumer lenders three years to cap rates at 20 percent and to limit each borrower’s outstanding debt to no more than a third of their annual income. Lenders previously charged as much as 29.2 percent interest.

Combined loans by Japan’s four largest consumer lenders, Acom Co., Promise Co., Aiful Corp. and Takefuji Corp., have fallen about 36 percent from six years ago, the Nikkei newspaper reported last month. As part of the acquisition agreement, GE agreed to indemnify Shinsei for any losses in excess of ¥203.9 billion related to excess interest refund claims.

The bank’s Tier 1 capital ratio, a key indicator of financial strength, was the lowest among eight nationwide lenders, at 6.64 percent at the end of last year, according to Bloomberg data. Shinsei sold ¥48.2 billion in preferred securities that can’t be converted into common stock last month.

Shinsei spent ¥4.4 billion in March to raise its stake in Shinki to 97 percent and plans to integrate it with Shinsei Financial, the bank said last month.