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Banking & Finance

Resona to repay 2003 injection; no exit in sight for Shinsei

TOKYO -- The effects of Japan's banking crisis in the 1990s are still lingering. Efforts to leave the crisis behind came to a turning point, however, when Resona Holdings said it would complete a repayment of more than 3 trillion yen ($24.9 billion) in public funds. 

Resona Holdings was granted public funds 12 years ago.

     The government injected taxpayers' money into the troubled banking group in 2003. It has taken Resona 12 years to emerge from what amounted to nationalization.

     In contrast, Shinsei Bank remains under effective state control. It has been unable to chart a path toward repaying public funds it received in 1998, when the bad-loan crisis started.

Safety in small lots

Resona is ready to complete its repayment largely because it has reinforced its finances. It has achieved this by unwinding cross-shareholding arrangements and increasing small-lot loans.

     Japanese banks often keep cross-held shares out of deference to their corporate clients. But Resona has reduced such holdings to around 300 billion yen, from 1.4 trillion yen when it was effectively nationalized.

     Resona has also promoted loans to small and midsize companies, along with mortgages. This was a break from the strategy that got the bank into trouble in the first place. Financial difficulties at large-lot borrowers had resulted in a sharp increase in nonperforming loans, prompting the injection of public funds into its capital base.

     The shift paid off following the collapse of Lehman Brothers of 2008. In fiscal 2008, which ended March 2009, Resona logged a consolidated net profit of 123.9 billion yen. Meanwhile, Japan's three largest banks registered hundreds of billions of yen in losses due to asset impairment charges and disposal of sour loans.

     Resona in 2011 made a big step toward repaying the government, raising 550 billion yen through an issuance of common shares. 

     Payments for the new shares were completed a few hours before the March 11, 2011, earthquake struck Japan. Considering the confusion that hit the financial markets after the disaster, a delay by a few hours could have dashed Resona's fundraising hopes.

Shinsei Bank received an injection from the government 17 years ago.

     Things have not worked out so well for Shinsei. Its aggressive business strategy, which included investments in securitized products and an acquisition of a consumer loan business, backfired after the Lehman shock. Starting in fiscal 2008, the bank incurred losses of about 140 billion yen for two straight years. Shinsei remains shackled to public funds totaling more than 200 billion yen, largely due to those losses. 

     Another reason Shinsei has been slow to return the money is that public funds were converted into common shares. To avoid hitting the government with losses, Shinsei cannot make repayments unless its stock price reaches about 744 yen, a level set by the Financial Services Agency in 2004.

     The stock last Thursday closed at 246 yen.

Leaving the '90s behind

In any case, measures to address the crisis are entering the final stages. 

     Aozora Bank will shortly complete its public fund repayment. Deposit insurance premiums paid by private banks to the Deposit Insurance Corp. of Japan -- meant to protect customers -- will be lowered as a result of the progress with repayments.

     The injection of taxpayer money into banks was aimed at shoring up the country's financial system. But it also raised questions about bankers' responsibility and gave poorly managed institutions a lifeline. At least, a burden on the public has been avoided: The government injected a total of 12.4 trillion yen to bail out banks and has so far collected 13.5 trillion yen, including profits generated in the process of recovery.

     Shinsei will continue to look for a way out. "I would like to pave the way for returning public funds by reinforcing our earnings," Hideyuki Kudo, a managing executive officer who will become president and CEO in June, told a news conference last Wednesday. Kudo will need to come up with a strategy strong enough to triple the bank's stock price.

     For Resona, a bright future is hardly guaranteed. In February, the bank announced a goal of raising its gross operating profit by 10% in the next three years. But with its operations limited to the domestic market, where interest rates are in the basement, the target will be "difficult to attain," Resona President Kazuhiro Higashi said.


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