MUFG, world's biggest bank group, set to debut

by Yasushi Azuma

Kyodo News

Mitsubishi UFJ Financial Group Inc., the world’s largest banking group by assets, will be launched Saturday with the merger of Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc. amid growing optimism over the economy.

With the integration of the two holdings firms, the number of Japan’s major banking groups will be reduced to three. The other two are Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc.

Subsidiaries of MTFG and UFJ Holdings — Mitsubishi Trust and Banking Corp. and UFJ Trust Bank, as well as Mitsubishi Securities Co. and UFJ Tsubasa Securities Co. — will also be integrated Saturday.

But the merger of their core banking units — Bank of Tokyo-Mitsubishi and UFJ Bank — won’t come until Jan. 1, apparently under strong pressure from financial authorities to ensure smooth system integration.

MUFG’s total assets will be 190 trillion yen, topping the 135 trillion yen of Mizuho, currently the biggest Japanese banking group in asset terms.

“The new banking group will be born at a time when the economic environment is improving with stock prices steadily rising while financial instability is abating,” a MTFG official said. “We believe we will be able to make a good start.”

The new group is optimistic about boosting profitability, aiming to become one of the top five global financial institutions by market capitalization by the end of fiscal 2008.

In fiscal 2004 through last March 31, MTFG posted a consolidated net profit of 338.42 billion yen, but UFJ Holdings incurred a group net loss of 554.53 billion yen due mainly to bad-loan disposal costs.

This means the combined balance of the two banking groups was in the red in fiscal 2004, but they forecast MUFG will post a net profit of 1.1 trillion yen in fiscal 2008 on a consolidated basis.

MTFG and UFJ Holdings aim to create the “strongest comprehensive financial group” by supplementing each other in many areas.

The Mitsubishi Tokyo group is strong in corporate banking, while retail banking is the stronghold of the UFJ group. Geographically, the two groups can also supplement each other — the Tokyo metropolitan area is the main service area for the Mitsubishi Tokyo group and the UFJ group is strong in the Kansai and Chubu regions.

“Considering the areas the two groups can complement each other, the merger between MTFG and UFJ is the best combination among the four major banking groups,” the MTFG official said.

Analysts say the relatively low profitability of Japanese banking groups comes from their reliance on corporate banking, while major overseas lenders depend on more lucrative fee-based revenues.

Admitting such a structural problem, the official said MUFG will boost the ratio of retail banking to 35 percent in fiscal 2008 in comparison with 16 percent in fiscal 2004, which is the combined figure of MTFG and UFJ Holdings.

A senior official at the Financial Services Agency said it is important for banks to raise profitability, but the agency has no plan to meddle with specific management strategies of each bank.

Regarding the postponement of the merger of BTM and UFJ Bank, the FSA official said the agency “might have been excessively cautious” about giving the green light to the merger because it is still haunted by the nightmare of major system troubles following the amalgamation of three banks to produce Mizuho Bank in April 2002.

BTM and UFJ Bank have already conducted several integration tests, and they plan to do more until Dec. 31.

MUFG will take over 1.5 trillion yen in public funds injected into UFJ Holdings and plans to complete the repayment by the end of fiscal 2007.

Many analysts welcome the merger as a positive development in Japan’s banking industry.

“The merger between MTFG and UFJ Holdings will become a major turning point,” said Hideo Kumano, chief economist at the Dai-ichi Life Research Institute.

The merger was agreed between MTFG and UFJ Holdings as a “final push” to accelerate the disposal of bad loans, and thus the integration will boost their capital base, Kumano said.

As the number of megabanks will be reduced to three from four, lending may slip in the short term but will grow back in the long run, he said.

Still, some analysts question the optimism about the birth of the giant banking group.

Commenting in general terms, Takehiro Sato, an economist and executive director at Morgan Stanley Japan Ltd., said, “I don’t think that the birth of a mammoth banking group and reducing the number of banks will necessarily lead to boosting the competitive edge.”

At stake is to what extent banks can really reduce costs to compete with major overseas lenders, Sato said, adding banks here should diversify their lending conditions depending on the client.