* 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 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
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
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.
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
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 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)