Companies cut their cross-shareholdings of allied firms to the lowest level in at least 19 years as banks stepped up selloffs ahead of stricter global requirements for capitalization.
Stocks held among corporate allies fell to 4.9 percent of the nation’s total outstanding shares in the year that ended March 31, a two-point drop from the previous year and the lowest since Daiwa Securities Group Inc. started monitoring the data in 1991, a report by the company’s research unit found.
“Cross-shareholdings held by banks are based on relationships with clients, so it doesn’t mean that the shares they hold are ones that are likely to grow,” said Keisuke Nitta, a strategist at NLI Research Institute. “A lot of the superior shares have already been sold off. It means a lot of unattractive stocks are still on their books.”
Banks are preparing for rules outlined by the Basel Committee on Banking Supervision that double their Tier 1 capital requirement. Tier 1 capital includes cash and equities, so volatile or poorly performing stocks weaken a bank’s ability to lend.
Companies are also trimming their holdings after the International Accounting Standards Board issued guidance last December that the current market value of shareholdings must be included in financial statements.
“Companies will have to care more about shareholders and return on equity, which are the things that foreigners are looking for,” said Hidehiro Tomioka, who manages about $1.4 billion at the Japanese asset management unit of Canadian-based financial services firm Manulife Financial.
Mutual shareholdings among banks have been falling since a 2001 law placed limits on the amount of stock lenders could hold on their balance sheets. Six major banks sold ¥6.5 trillion in stock in 2002, according to Kengo Nishiyama, a strategist at Nomura Holdings Inc.
The number of companies who have cross-held shares with banks has at least halved to 43 percent in 2009, from 88 percent in 1995, Daiwa said in a report based on research of 3,664 companies on the Tokyo, Osaka, Nagoya and Jasdaq exchanges.
Further reducing cross-shareholdings may lead to better corporate governance and higher quality capital for banks, making shares more attractive to foreign investors, said Hideaki Miyajima, a commerce professor at Waseda University in Tokyo.
Foreign ownership of Japanese stocks rose to 26 percent of total outstanding shares in 2009 from 17.7 percent in 2002, according to Tokyo Stock Exchange data.
The three largest banks are likely to offload about ¥2 trillion in shareholdings by 2013 to meet Basel III requirements outlined in September, Miyajima said.
Mizuho Financial Group Inc., the nation’s third-biggest listed bank, has said it plans to sell ¥1 trillion in shares in other companies by March 2013.
Larger rival Sumitomo Mitsui Financial Group Inc. projects a ¥300 billion cut in the next three years, the bank said in September.
Mitsubishi UFJ Financial Group Inc., Japan’s biggest listed bank, intends to reduce holdings after speaking with its partners, spokesman Shinya Matsumoto said.
The three banks had a combined ¥8.15 trillion in shares of other companies as of March 31, according to their financial statements.
Daiwa said in the report that investor pressure to reduce cross-holdings is intensifying, suggesting demand for better asset performance.
“Japan is entering a new phase of unwinding cross-shareholdings,” Nitta said.
The TSE opposes cross-shareholding that deters foreign investors. The practice doesn’t help safeguard shareholders’ best interests, said Hironaga Miyama, senior executive officer at the bourse.
“Too much cross-holding creates mutual back-scratching,” Miyama said.
A reduction of cross-shareholdings will help further dismantle remnants of 19th century business groups, forcing firms to pay greater attention to shareholder demands, according to analysts, including Nomura’s Nishiyama.
Conglomerates such as Mitsubishi, Mitsui and Sumitomo, known as zaibatsu until after World War II, developed the economy with subsidiaries owning stakes in each other, while affiliated banks provided financing.
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