Sumitomo Mitsui Banking Corp. disbanded Monday and merged with Wakashio Bank, a tiny SMBC subsidiary.
The merger constitutes an unusual strategy aimed at generating financial resources to cover huge latent shareholding losses. The merged entity retains the SMBC name.
SMBC’s merger with the second-tier regional based in Tokyo provides the new entity with resources of 2 trillion yen. These funds may be used to remove latent losses on SMBC shareholdings, according to Sumitomo Mitsui Financial Group Inc., SMBC’s holding company.
Under the Commercial Code, the surviving firm in a merger is not obliged to take over the entire sum of the net worth of the disbanding firm. A bank’s net worth consists of the total of its stock capital, legal reserves and capital surplus.
The positive difference between the net worth of a disbanding firm and the part of the net worth that is taken over by a surviving company can be lawfully used to cover share-related latent losses.
With the premerger SMBC having had a net worth of 2.69 trillion yen as of Sept. 30 and the new SMBC having been founded with capital of 560 billion yen, the merger has given the new bank resources of roughly 2.1 trillion yen with which to cover its share-related latent losses.
SMBC President Yoshifumi Nishikawa and SMBC Chairman Akishige Okada have retained their positions.
Wakashio Bank President Hiroyasu Ichikawa will serve as a senior managing director of the new firm.
The premerger SMBC, based in Tokyo, was a mammoth bank with 62.55 trillion yen in outstanding loans and 61.44 trillion yen in deposits on a group basis. Wakashio was a wholly owned unit of SMBC, boasting assets of just 0.49 trillion yen.
The premerger SMBC had shareholdings of 4.71 trillion yen as of Sept. 30 on a group basis, with unrealized losses on these shareholdings standing at 947.3 billion yen, according to the Sumitomo Mitsui Financial Group.
On Feb. 7, the premerger SMBC padded its capital base by 150.3 billion yen by selling preferred shares to U.S. investment bank Goldman Sachs Group Inc.
SMBC further boosted its capital base by 345 billion yen March 11 through additional sales of preferred shares to European and U.S. investors.
These maneuvers drove up the group capital adequacy ratio of SMBC by 0.78 percentage point, the bank said. Its capital adequacy ratio stood at 10.37 percent as of Sept. 30.