The Mizuho Financial Group, the world’s biggest financial empire in terms of assets, takes shape today, integrating Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan under a newly created holding company.

Boasting aggregate assets of 134.4 trillion yen, the group hopes to become one of the world’s top five financial firms in terms of profit.

But its restructuring timetable shows it will be many years before the full benefits of the merger will be reflected in the firm’s earnings.

When the merger of the three banks was announced in August 1999, Japanese observers raved that it trumped the megadeals being made in the United States and Europe and would help return Japanese banks to their pedestal as the world’s biggest in terms of assets.

That was a year ago.

Today, analysts have cooled toward Mizuho Holdings Inc., pointing out the new giant must navigate a long and rocky road before it can overtake foreign rivals.

“This merger is a truly Herculean task,” said Brian Waterhouse, bank analyst for HSBC Securities. “Merging two banks is difficult enough. Three — and three banks of

this size — is something most would rather avoid.”

David Atkinson, a banking analyst at Goldman Sachs, wrote in a report that “the decision to merge was radical, but the strategy for the new bank is not as radical as the merger.”

Operations will not be fully integrated until April 2002, and Mizuho itself has said it does not expect benefits to be reflected in earnings until fiscal 2005.

Based on the performance of the three banks in fiscal 1999, which ended in March, Mizuho’s return on equity, a measure of corporate profitability, is estimated at around 3.8 percent. This is far lower than the 23.6 percent boasted by Chase Manhattan Bank and 22.1 percent by Citigroup.

To catch up with these and other global financial conglomerates, Mizuho has decided to begin by focusing on fee-based services. On Oct. 2, it will merge the banks’ securities and trust banking affiliates, forming Mizuho Securities Co. and Mizuho Trust & Banking Co.

“But something drastic, like buying an investment bank in the U.S., might eventually be necessary,” said Katsuhito Sasajima, a senior analyst at UBS Warburg. Foreign investment bankers have a comfortable lead in the lucrative areas of investment banking and asset management, he said.

The bank must also contend with a rapidly changing landscape.

The Mizuho announcement itself triggered a flurry of domestic mergers, ushering in an era of megabanks that will be dominated by four players.

Come April, the Bank of Tokyo-Mitsubishi, Mitsubishi Trust & Banking Corp. and Nippon Trust Bank will join hands under a holding company, as will Sanwa Bank, Tokai Bank and Toyo Trust & Banking Co. Also, Sumitomo Bank and Sakura Bank will merge to form Sumitomo Mitsui Banking Corp.

Sasajima in May conducted a survey of 69 fund managers in Japan and overseas to gauge their outlook on Japan’s banks. Their top pick was Sumitomo-Mitsui; Mizuho came in last.

“Mizuho is an all-around player, and unfortunately, little stands out, other than its size,” Sasajima said. “Sumitomo-Mitsui has an aggressive strategy to go online.”

Lingering problems such as mountains of bad debt also cloud the new bank’s horizon. The three banks reported a combined 3.74 trillion yen in problem loans, about 3.5 percent of total assets, as of March 31.

If the situation is not improved and more loans sour, Mizuho could find itself watching much of its return on equity chasing those bad loans.

Earlier this week, another gray cloud appeared. A magazine reported that DKB-backed Orient Corp., a finance firm, has a debt excess of 473.7 billion yen.

“This is bad publicity for DKB, which is bad publicity for Mizuho,” said HSBC’s Waterhouse.

What’s more, internal strife among the three banks continues to slow the integration, as each seeks to protect its interests and workers, whisper officials at rival banks.

Mizuho aims to slash its total workforce by 7,000, or 20 percent, to around 28,000, and to prune 30 percent of its domestic and overseas branches to leave 550.

“Each has pride in its history and even its own language,” admitted an employee at Mizuho Holdings. “There are clashes, but we also have a job to do.”

Most of the workforce reductions aren’t coming any time soon. Officials have opting to cut jobs through early retirement and over six years.

Amid all these concerns, Mizuho Holdings made a smooth debut on the first section of the Tokyo Stock Exchange on Thursday. It opened at 827,000 yen and closed at 871,000 yen.

The stock, in fact, attracted the day’s heaviest volume, as 64.9 billion yen in Mizuho shares changed hands.

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