News that the Tokyo Metropolitan Government is apparently planning to withdraw from managing ShinGinko Tokyo Ltd. has opened old wounds for residents who just seven years earlier saw their tax money poured into resuscitating the bank that was supposed to become a savior of small businesses.
The move came to light on May 26 after media reports that said Tokyo TY Financial Group Inc. planned to merge with ShinGinko Tokyo, which was set up in 2005 with a mission to lend to small Tokyo firms shunned by banks at the time.
But it again raises a crucial question: Will the metro government honor its commitment to protect the money used to bail out the bank?
Here are questions and answers on the issue.
What is ShinGinko Tokyo?
ShinGinko Tokyo is a bank that started operation in April 2005 as the pet project of former Tokyo Gov. Shintaro Ishihara.
Its target clients, small businesses, were in dire need of funds because mainstream banks, saddled with nonperforming loans that were weighing on their finances, grew reluctant to lend to riskier borrowers.
The idea was a key part of Ishihara’s successful 2003 election campaign, which won him a second term in office.
The bank debuted with fanfare as the metro government invested ¥100 billion for an over 80 percent stake, making it the first local government to set up such an institution.
Why did the bank fail?
The promise of saving small firms was overshadowed in just three years as it aggressively lent money without requiring collateral. The reckless lending took a toll in the form of a cumulative deficit of over ¥100 billion, sparking outcries of mismanagement that wasted Tokyo taxpayers’ money.
Ishihara took responsibility for the situation but blamed it on the bank’s failure to anticipate that rivals would also increase lending to small firms out of sheer competition.
The Tokyo Metropolitan Assembly eventually approved an additional ¥40 billion investment to bail the bank out, accompanied by a pledge to protect the fresh investment.
The bank has since continued rebuilding by reshuffling its management in 2007 and consolidating its branches, which peaked at eight, into just one — its headquarters in Shinjuku Ward.
Current Gov. Yoichi Masuzoe, who succeeded Naoki Inose, right-leaning Ishihara’s hand-picked successor, apparently takes a dim view of the idea of a local government running a bank.
It is also believed the metro government has decided the bank has recovered enough, after turning six consecutive years of profit till the year ended in March, to justify last month’s move.
“It’s not easy for the metropolitan government to manage a financial institution. It’s obvious if you look at the result,” Masuzoe told reporters May 28 after reports broke of the merger plan. “My view is, banking is best left to professionals of banking.”
He also criticized the bank by saying it had no credit crunch to combat at the time it was established, another indication that he thinks the metropolitan government should not dabble in banking.
What are the issues?
Ryoji Yoshizawa, a chief analyst at credit rating agency Standard & Poor’s, said there is discrepancy in the bank’s initial purpose and the way it currently makes ends meet.
“ShinGinko Tokyo is back in black, but its main earnings driver is its securities investment” rather than revenues from lending activities, Yoshizawa said. “That contradicts with its initial purpose of lending to a segment where other banks were reluctant.”
“The bank still remains in a status where it can fall into deficit if bad loans increase,” he added.
Yoshizawa also said the Tokyo government’s decision to divest from the bank makes sense, from a purely business point of view.
“As an investor, I would surmise, the Tokyo government decided the bank has already completed its mission, looking at both its purpose and its business performance,” he said. “I think their decision makes sense.”
What is the plan?
ShinGinko Tokyo is in negotiations to merge with local banker Tokyo TY Financial Group, the holding company of Tokyo Tomin Bank Ltd. and Yachiyo Bank Ltd., through a stock-swap arrangement in which Tokyo TY would offer its shares in exchange for the acquisition of ShinGinko Tokyo.
Under the deal, ShinGinko Tokyo would come under the control of Tokyo TY, just as the two other subsidiaries, and the metropolitan government is expected to end its direct involvement in steering the bank. This means involvement of the Tokyo government in the bank’s operation will shrink.
ShinGinko Tokyo is expected to hold a shareholders’ meeting next week to vote on the merger plan, as well as officially appoint Hidenori Tsunehisa, a current director, to replace President Hirotaka Terai in a board meeting the same day.
For Tokyo TY, the merger fits into its strategy to expand its customer base amid a wider wave of industry alignment sweeping over local banks.
What about the money?
Whether the metro government will keep its promise and protect its ¥40 billion investment in ShinGinko Tokyo remains to be seen because plans are still being worked out.
For now, Masuzoe said “our fundamental goal is to keep the assembly’s pledge” to protect it, adding, “There are various ways of management integration (of the banks), and I want to closely watch (the development).”