Banks should use a government-backed share purchase program to reduce stock holdings that caused $10 billion of losses at Japan’s three biggest lenders last year, the country’s top financial regulator said.
“A bank’s financial standing is linked to its holdings of investments, such as shares, and I’d like to see forward-looking risk controls,” Katsunori Mikuniya, 58, who became commissioner of the Financial Services Agency on July 14, said in an interview. “The Banks’ Shareholdings Purchase Corp. is now available, and we’d like banks to use it.”
A 28 percent rally on the Nikkei 225 stock average since the April 1 start of the business year may give banks a chance to sell stocks at a profit.
Mitsubishi UFJ Financial Group Inc., the nation’s biggest bank, said last month it was sitting on ¥500.7 billion in unrealized gains on its share portfolio after booking ¥409 billion in losses last year.
“The large banks all have huge cross-shareholdings in equities and they don’t need these things,” said Daniel Tabbush, a Bangkok-based analyst at CLSA Asia-Pacific Markets. “The problem is there is too much volatility in the earnings of the Japanese banks and capital with the market going up and down.”
The government passed legislation in March allowing it to buy as much as ¥20 trillion in shares held by the lenders to boost their capital and bolster a stock market. The Banks’ Shareholders Purchase Corp. purchased a total of ¥137.9 billion in stocks by the end of July, equivalent to 6.9 percent of the fund’s budget to March 2012.
Laws on bank shareholdings are presently limited to ensuring that stock portfolios don’t exceed Tier 1 capital.
Mikuniya, who joined the Finance Ministry in 1974 and served as director general of the regulator’s supervisory bureau before becoming FSA commissioner, said further reductions should be voluntary. Mikuniya, who was speaking last Wednesday, cautioned that forced sales could be disruptive to the economy and markets.
Banks held ¥18.7 trillion in shares as of March 31, compared with ¥44.3 trillion in March 2001, according to data from the Japanese Bankers Association.
“Banks worry about losing their relationships with firms they’re invested in, and being able to lend to them after selling shares,” said Reiko Toritani, an analyst at Fitch Ratings in Tokyo. “Companies don’t want banks to sell the shares, as they want stable shareholders to block takeovers.”
The buyback program allows banks to sell at market prices without immediately affecting the stock of the companies, because the Banks’ Shareholders Purchase Corp. can hold the securities until at least 2022.
Share holdings by banks date back to before the war, when many lenders were parts of zaibatsu business conglomerates that spanned finance, trade and industry. Cross-shareholdings continued in the postwar era, even after the U.S. forced the formal breakup of the zaibatsu.
Mitsubishi UFJ, and its two largest rivals, Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., have been forced to sell more than $18 billion in shares since December to boost capital after booking a combined loss of ¥1.2 trillion in the fiscal year that ended March 31.
Mizuho Chief Executive Officer Takashi Tsukamoto said in March he wanted to cut the bank’s stockholdings to ¥2 trillion to reduce risk to earnings. The lender, which had the largest share writedowns of any bank last year, had ¥2.6 trillion in stockholdings at the end of March.
Mitsubishi UFJ CEO Nobuo Kuroyanagi said in May he also wanted to reduce shareholdings in consultation with affected clients. The bank had the largest shareholdings of any Japanese bank at the end of June, at ¥4.35 trillion.
“It’s a good idea to try to get them to sell,” said CLSA’s Tabbush. “The best thing they could do with the money is pay it out in dividends.”