TOKYO -- Japan's three megabanks are struggling to reduce cross-shareholdings for fear of angering key clients even as such arrangements are frowned upon as going against a push for better corporate governance.
Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group maintained the same amount or expanded two-thirds of their biggest shareholdings in nonfinancial companies in the last two years, according to their annual securities reports from late June.
Industry leaders like Toyota Motor and Daiwa House Industry featured prominently on the list. These companies tend to invest heavily and pursue big acquisitions, making them key banking clients. The megabanks are involved in a wide range of business with them, including buying their bonds and managing their pension funds.
Cross-shareholdings have long been used by nonfinancial companies to gain stable stockholders in Japan, and breaking away from that old practice could harm business ties. Takeda Pharmaceutical snubbed Mizuho when taking out massive bridge loans to fund its $62 billion takeover of Irish drugmaker Shire. The bank took the exclusion as a response to its unloading of Takeda shares in the past, a Mizuho executive said.
"Every time I bring up reducing cross-shareholdings, clients say the same thing: 'I understand, but we're exempt, right?'" a bank executive said. Companies worry that their stock prices will suffer if banks sell shares they own.
Still, the arrangements pose risks for the banks. MUFG, SMFG and Mizuho together hold 5.4 trillion yen ($48 billion) in stocks. Though just a quarter of a recent peak, this amounts to about 30% of their own assets. This makes them much more vulnerable to fluctuations in the stock market than American and European banks, whose percentages stand closer to 5%.
Cross-shareholdings pose a governance issue as well. The Tokyo Stock Exchange revised Japan's corporate governance code on June 1, urging companies to assess the benefits and risks of such holdings and to disclose policies on reducing them. The arrangements could also keep institutional investors like banks and life insurers from speaking out against problematic business practices -- a role they are increasingly expected to fill.
Pressured by the Financial Services Agency, the megabanks announced in the autumn of 2015 that they would unload just under 2 trillion yen, or about 30%, of their shareholdings in three to five years. They were about halfway through as of their most recent fiscal year-end this March. But they now need to start selling shares in their biggest clients to meet the final goal, experts argue.
"Negotiations to reduce cross-shareholdings are only going to get tougher," a megabank executive said.