SMFG ‘Reality Check’ Hints at Cracks in Bank Capital

April 10 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc. posted an unexpected $3.9 billion loss and announced plans to seek capital, adding to evidence that Japan’s biggest banks may struggle to weather the deepening recession.

The Tokyo-based lender, Japan’s second-largest by market value, yesterday said it may raise as much as 800 billion yen ($8 billion) to restore a balance sheet weakened by bad loans and losses on investments including Barclays Plc. The news came a day after Moody’s Investors Service cut the credit ratings of Mizuho Financial Group Inc. and said the bank may need more cash.

Sumitomo Mitsui, Mizuho and Mitsubishi UFJ Financial Group Inc. plowed a combined $11 billion into ailing Western rivals, fueling speculation that they would seize on the global credit crisis to expand abroad. The banks are now retrenching under the weight of swelling investment losses and a recession that’s pushed bankruptcies in Japan to a six-year high.

“It is now reality-check time for those who thought the Japanese banking system had weathered the storm and was going to be a bastion of strength in the global banking system,” said Kirby Daley, a strategist at Newedge Group in Hong Kong. “Mountains of bad loans, topped with cross-shareholdings and stock portfolios which are in the red, in the current environment makes for a very bad mix.”

Sumitomo Mitsui’s shares didn’t trade at the open of the Tokyo market today as sell orders overwhelmed buy offers. They were poised to drop 14 percent following a 16 percent decline in the company’s American depositary receipts. Mizuho slumped 9.6 percent at 9:40 a.m. in Tokyo, it biggest decline in five months, while Mitsubishi UFJ dropped 3.6 percent.

Bad Loans

The bank, which wrote down 53.2 billion yen on its investment in Barclays, had in October forecast net income of 180 billion yen. The median of six analyst estimates compiled by Bloomberg in the past month was for a 47.6 billion yen profit. Earnings a year earlier totaled 461.5 billion yen.

Bad loan costs at Sumitomo Mitsui reached about 760 billion yen, Takeshi Kunibe, a member of the company’s board, told reporters. The bank also reduced deferred tax assets by about 30 percent to 670 billion yen and will book 220 billion yen in losses on stocks, he said.

“Japanese banks will have to do large-scale capital raisings in the near future,” said Makoto Haga, the president of Wing Asset Management Co., a Tokyo-based hedge fund. “It was a mistake to jump into investments in overseas banks -- now they’re hurting existing shareholders by issuing new stock.”

Dividend Cut

Mitsubishi UFJ, which has raised more than $13 billion in capital since November, poured $9 billion into Morgan Stanley last year. Mizuho, which has raised $4.4 billion of capital since December, invested $1.2 billion in Merrill Lynch & Co. in 2008 before it foundered and was bought by Bank of America Corp.

Sumitomo Mitsui invested 500 million pounds ($737 million) in Barclays in July at a price of 296 pence a share. The London- based bank’s stock slumped 50 percent to 148 pence between then and the end of the Japanese financial year on March 31.

It will cut its dividend 25 percent to 90 yen a share, according to yesterday’s statement. The sale of new stock may dilute the value of existing shares in Sumitomo Mitsui by 30 percent, the company said.

Sumitomo Mitsui’s stock fell 48 percent during the fiscal year, the sixth-biggest drop on the bank index, which declined 39 percent. The Nikkei 225 Stock Average dropped 35 percent during the same period.

‘Bottleneck Issue’

“Japanese banks’ shares won’t look attractive until they sort out the ‘bottleneck’ issue of cross-shareholdings,” said Shinichi Iimura, a Tokyo-based analyst at Merrill Lynch & Co.

Sumitomo Mitsui lends more to smaller companies than its peers and faces greater risk from rising defaults as the recession deepens, according to Macquarie Group Ltd. Bankruptcies among Japan’s listed companies reached 33 last year, a postwar record, according to Tokyo Shoko Research Ltd.

Mizuho has reduced its full-year earnings forecast twice as Japan’s recession deepens amid a record slump in exports. It most recently flagged a profit of 100 billion yen.

Mitsubishi UFJ has also cut its annual net income forecast twice, most recently to 50 billion yen.