Ailing UFJ Holdings Inc. on Wednesday asked rival Mitsubishi Tokyo Financial Group Inc. to merge with it in a deal that would create the world’s biggest banking group, with 190 trillion yen in assets.

The request is seen as a desperate bid by UFJ to survive, as the nation’s fourth-largest banking group struggles with massive bad loans.

The proposed merger would leave Japan with three major banking groups, including Mizuho Financial Group and Sumitomo Mitsui Financial Group.

UFJ Holdings also decided to scrap its plan to sell subsidiary UFJ Trust Bank to Sumitomo Trust & Banking Co. for about 300 billion yen.

“We have reached the conclusion that we need to aim for a new business integration in light of financial and business strategies,” UFJ Holdings said in a statement, after convening a special board meeting.

The proposed merger, which analysts see as a rescue takeover by MTFG, may ease worries over Japan’s financial system stemming from the instability of the UFJ group.

For Mitsubishi Tokyo, merging with UFJ would boost its competitiveness in retail banking operations, which is UFJ’s strength.

“We will immediately start considering the offer positively,” MTFG said in a statement released after UFJ made the formal request in the evening.

Banking sources said UFJ Holdings wants to first merge the two holding companies by the end of next March.

The four banks belonging to the two groups — Bank of Tokyo-Mitsubishi, Mitsubishi Trust & Banking Corp., UFJ Bank and UFJ Trust Bank — would be retained for the time being under the combined company.

But they could be reorganized into two entities, one for banking and another for trust banking, in two to three years.

They would also consider integrating each group’s brokerages, the sources said.

Media reports of the proposed merger helped MTFG shares jump by 7.4 percent, and UFJ rose by 11 percent to hit its daily limit Wednesday.

But some analysts warned that the proposed merger faces some hurdles.

“It is too early to judge the impact of the merger, as its fate will totally hinge on how MTFG crafts the plan,” said Naoko Nemoto, senior analyst at credit-rating agency Standard & Poor’s.

Unless MTFG extensively restructures the UFJ group and clears its massive bad loans, MTFG will probably not benefit much from the tieup, Nemoto said.

The financial health of UFJ Holdings is weaker than the three other banking groups. It posted a net loss of 402.8 billion yen for fiscal 2003, its third consecutive year in the red.

As of March 31, UFJ held bad loans worth 3.9 trillion yen, or 8.5 percent in the ratio of nonperforming loans to overall outstanding loans. The ratio is far higher than the 4 percent target for mega-banks set by the government in October 2002. Another problem is UFJ Holdings’ decision to drop its plan to sell UFJ Trust to Sumito Trust.

Following UFJ’s announcement, Sumitomo Trust said it may take legal action, as the purchase plan is based on a legally binding agreement signed May 21.

“We replied (to UFJ) that we cannot agree with such a proposal” to scrap the plan, Sumitomo Trust said.

In June, the Financial Services Agency slapped UFJ Holdings with a series of business-improvement orders over its attempt to evade an agency inspection, its inappropriate handling of loans to small companies and operational problems.

As part of efforts to rebuild management, the UFJ group decided to sell UFJ Trust to Sumitomo Trust for business integration, hoping to improve its financial position with proceeds from the sale.

But it concluded that it would not be sufficiently rehabilitated with a business alliance only in the trust division and is now opting for comprehensive management integration with Mitsubishi Tokyo, banking sources said.

At the end of March, Mitsubishi Tokyo Financial Group had total group assets of 106.6 trillion yen, and UFJ Holdings had total group assets of 82.1 trillion yen.

Mitsubishi Tokyo was created in April 2001. Its ratio of bad loans to total lending stood at about 2.9 percent as of the end of March.

UFJ Holdings was established in April 2001 by Sanwa Bank, Tokai Bank and Toyo Trust & Banking Co. In January 2002, Sanwa and Tokai merged to become UFJ Bank, while Toyo Trust was renamed UFJ Trust.

Information from Kyodo added Mixed reactions The government said Wednesday it will closely monitor developments in the possible merger between the UFJ banking group and Mitsubishi Tokyo Financial Group Inc., while the head of the nation’s largest business lobby welcomed the possible merger.

However, businesses in the central Japan region centering on Nagoya, where UFJ Holdings Inc. is based, expressed concern that the relationship between the regional economy and the banking group may fade further.

On Wednesday morning, Financial Services Minister Heizo Takenaka said in a news conference, “It is a matter of private companies’ management strategy . . . we want to observe the situation closely.”

Meanwhile, Hiroshi Okuda, chairman of the Japan Business Federation (Nippon Keidanren), told reporters “it is good” for the business community to have a strong bank.

Businesses in central Japan expressed concern, however, about whether business ties between regional firms and the UFJ group will be maintained despite the possible merger.

“I hope that (UFJ Bank) will devote itself to its original operations of providing funds smoothly to companies in the region as the only city bank that is based in the region,” said Hiroji Ota, chairman of the Chubu Economic Federation.

Sokichi Minoura, chairman of the Nagoya Chamber of Commerce & Industry, said, “Though I feel that (the merger) is inevitable, it would be regretful” if UFJ’s role in the region becomes smaller.

Large borrowers from the UFJ group, such as supermarket chain Daiei Inc. and Sojitz Holdings Corp., the holding firm of trading house Sojitz Corp., also expressed concern, as a merger would force them to review their restructuring efforts.

UFJ drops lawsuit

UFJ Bank on Wednesday dropped a 100 million yen damages suit against publisher Kodansha Ltd. after reaching a settlement at the Tokyo High Court.

Kodansha agreed to issue a document saying, “we respect the points of your criticism” over an article in the December 2002 issue of the Gekkan Gendai monthly magazine that said ratings agencies might lower their short-term ratings on UFJ and that the bank could be nationalized.

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