Japanese Banks Should Cut Their Stock Holdings, Regulator Says

Japanese banks should use a state- backed share purchase program to reduce stock holdings that caused $10 billion of losses at the nation’s three biggest lenders last year, the country’s top financial regulator said.

“A bank’s financial standing is linked to its holdings of investments such as shares, and I’d like to see forward-looking risk controls,” Katsunori Mikuniya, 58, who became commissioner of the Financial Services Agency on July 14, said in an interview. “The Banks’ Shareholdings Purchase Corporation is now available, and we’d like banks to use it.”

A 28 percent rally in the Nikkei 225 Stock Average since the April 1 start of Japan’s financial year may give banks a chance to sell stocks at a profit. Mitsubishi UFJ Financial Group Inc., the nation’s biggest bank, said last month it was sitting on 500.7 billion yen of unrealized gains on its share portfolio after booking 409 billion yen of losses last year.

“The large banks all have huge cross shareholdings in equities and they don’t need these things,” said Daniel Tabbush, a Bangkok-based analyst at CLSA Asia-Pacific Markets. “The problem is there is too much volatility in the earnings of the Japanese banks and capital with the market going up and down.”

The government passed legislation in March allowing it to buy as much as 20 trillion yen of shares held by the lenders to boost their capital and bolster a stock market. The Banks’ Shareholders Purchase Corporation purchased a total of 137.9 billion yen in stocks by the end of July, equivalent to 6.9 percent of the fund’s budget to March 2012.

Voluntary Cuts

Japanese laws on bank shareholdings are presently limited to ensuring that stock portfolios don’t exceed Tier 1 capital. Mikuniya, who joined Japan’s finance ministry in 1974 and served as the director general of the regulator’s supervisory bureau before becoming commissioner, said further reductions should be voluntary. Mikuniya, who was speaking on Aug. 5, cautioned that forced sales could be disruptive to the economy and markets.

Banks held 18.7 trillion yen in shares as of March 31, compared with 44.3 trillion yen in March 2001, according to data from the Japanese Bankers Association.

“Banks worry about losing their relationships with firms they’re invested in, and being able to lend to them after selling shares,” said Reiko Toritani, an analyst at Fitch Ratings in Tokyo. “Companies don’t want banks to sell the shares as they want stable shareholders to block takeovers.”

The state-backed buyback program allows banks to sell at market prices without immediately affecting the stock of the companies, because the Banks’ Shareholders Purchase Corporation can hold the securities until at least 2022.

Mizuho, Sumitomo

Share holdings by the Japanese banks date back to before World War II, when many were parts of business conglomerates that spanned finance, trade and industry. Cross-shareholdings continued in the postwar era, even after the U.S. forced the formal breakup of these business groups.

Mitsubishi UFJ, and its two largest rivals, Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. have been forced to sell more than $18 billion of shares since December to boost capital after booking a combined loss of 1.2 trillion yen in the fiscal year ended March 31.

Mizuho Chief Executive Officer Takashi Tsukamoto said in March he wanted to cut the bank’s stockholdings to 2 trillion yen to reduce risk to earnings. The lender, which had the largest share writedowns of any bank last year, had 2.6 trillion yen in stockholdings at the end of March.

Mitsubishi UFJ CEO Nobuo Kuroyanagi said in May he also wanted to reduce shareholdings, in consultation with affected clients. The bank had the largest shareholdings of any Japanese bank at the end of June, at 4.35 trillion yen.

“It’s a good idea to try to get them to sell,” said CLSA’s Tabbush. “The best thing they could do with the money is pay it out in dividends.”