UPDATE 2-Japan's Aozora, Shinsei confirm merger talks

Thu Jun 25, 2009 12:33am EDT

* Aozora, Shinsei in talks to form Japan's 6th biggest bank

* Shares of Aozora, Shinsei jump more than 5 percent

* Both banks hit by losses from toxic assets (Adds analyst quote, background)

By David Dolan

TOKYO, June 25 (Reuters) - Aozora Bank (8304.T) and Shinsei Bank (8303.T), two loss-making lenders backed by U.S. investors, confirmed they are in talks to merge, a tie-up that would create Japan's sixth-largest bank.

The news lifted their shares -- with Aozora up nearly 6 percent and Shinsei up more than 7 percent -- as the lenders acknowledged the talks for the first time on Thursday, a sign that negotiations may be progressing.

A merger would give Aozora access to Shinsei's retail deposits to ease its funding needs and could provide Shinsei with a much-needed boost of Tier-1, or core capital.

"One is bringing a lot of capital to the table, one is bringing a lot of liquidity." said Ismael Pili, bank analyst at Macquarie Capital Securities in Tokyo.

"Aside from the scale, it's the balance-sheet relief that's going to be attractive to a lot of investors."

The market value of both banks has been eroded in the last two years due to losses on U.S. subprime mortgages and other toxic assets.

Sources told Reuters in April the two were discussing a merger. Japanese media have since reported that talks may have stalled over disagreements between the banks' major shareholders.

Aozora is majority-owned by Cerberus Capital Management [CBS.UL], while Shinsei is one-third owned by buyout firm JC Flowers and Co.

"While the two banks are currently in discussions, (Aozora) has not made any decisions that need to be disclosed," Aozora said in statement. Shinsei issued a similar statement.

The banks plan to announce the merger as early as next month and would aim to merge operations next year, public broadcaster NHK and Kyodo News Agency said.

BIGGER SIZE

The combined bank would have assets of about 18 trillion yen ($188 billion), putting it closer in size to rivals such as Resona Holdings (8308.T) and Sumitomo Trust and Banking 8403.T.

Both Aozora and Shinsei have said they aim to focus on domestic lending after taking heavy losses on risky overseas investments. In the last business year, Aozora lost 242.6 billion yen, while Shinsei lost 143 billion yen, hit by losses on toxic assets.

However, ratings agency Standard and Poor's has said the merger would have limited benefits, citing the banks' similar business models and weak profitability.

Both Aozora and Shinsei were nationalised following Japan's banking crisis a decade ago and later sold to foreigners, who were criticised by the Japanese media for making massive windfalls at the expense of taxpayers.

The two banks and their American owners have also been criticised for losing billions of yen on risky investments backed by U.S. subprime mortgages, while still owing money to the government.

The government pumped a total of 621 billion yen into the two banks and their predecessors, and is still owed more than half of that. (Additional reporting by Mayumi Negishi) (Editing by Saeed Azhar)