UnionBanCal bid no panacea for Japan's ailing MUFG

By David Dolan - Analysis

TOKYO (Reuters) - Mitsubishi UFJ Financial Group's (8306.T) $3 billion bid to take full control of U.S. regional lender UnionBanCal Corp UB.N marks the latest step abroad by a Japanese financial firm, but is unlikely to fix the Japanese lender's real ailment: a stalling core business.

Relatively unscathed by the heavy subprime losses that struck Western banks, Japanese financials are slowly increasing their stakes outside the domestic market, which is saddled with a sputtering economy and a declining population.

But even as MUFG aims to buy the remaining 35 percent in UnionBanCal that it does not already own, analysts say the deal cannot remedy the grim outlook for earnings at home, where Japan's biggest bank still draws the bulk of its profits.

"Yes, they can grow overseas -- they can grow their loans, they can do acquisitions -- but they just can't deal with this domestic problem," said Kristine Li, Japan banking analyst at KBC Securities. "No matter what they do overseas, it won't give them enough additional earnings to justify their falling domestic business."

MUFG, valued at around $90 billion and one of the world's largest banks in terms of assets, said on Tuesday it would bid $3 billion to make San Francisco-based UnionBanCal a wholly owned subsidiary.

But a special committee of UnionBanCal's directors responded by saying the offer of $63 per share undervalues the U.S. bank, and is not in the best interests of its minority shareholders.

Shares of UnionBanCal have advanced since the offer, closing at $65 in New York on Wednesday, indicating that investors are betting MUFG may have to raise its offer.

Some analysts have said the bank might need to pay as much as $70 per share, 11 percent higher than its initial offer price.

MUFG, the most conservative firm in the rigid world of Japanese banking, has since made little comment.

"There is no change in our policy that we are open to talks with the special committee," a spokesman said.

WEAK RESULTS

The bid comes just after MUFG posted another quarter of lackluster results.

The bank said last week that first-quarter net profits fell by more than 66 percent from the previous year, hurt by more credit losses and the weakening domestic economy. Mitsubishi UFJ has forecast virtually no growth this year.

The bank's underlying numbers were also bleak: core operating profit fell by a quarter, while income from fees and commissions, which reflects earnings from investment banking and sales of investment products, dropped by 10 percent.

Net interest income, which gauges profits from lending, rose by less than 1 percent.

Hiroaki Osakabe, a fund manager at Chibagin Asset Management, said he was concerned about the amount of money involved in the bid, given MUFG's underlying weakness.

"Their results were really bad and is this really a good way to use their money?"

As the struggle between Tokyo and California continues, at least one certainty is emerging: that Japan's slack economy is only headed for worse, which is likely to further squeeze bank earnings.

Property developer Urban Corp 8868.T this week folded under $2.4 billion in debts, the latest in a stream of bankruptcies among property firms.

Real estate firms have been waylaid by steep price rises for construction materials and as the tougher economy has slowed demand for homes.

Analysts have been watching the recent spike in bankruptcies, which means that banks will likely need to raise their provisions against bad loans, and further rein in lending.

KBC's Li said that given such conditions, MUFG might not want to part with the $3 billion to take over UnionBanCal.

"Immediately it will give them additional earnings, but it will also use some capital that could prove to be very, very valuable, or much needed, later in this cycle," she said.

(Additional reporting by Elaine Lies)

(Editing by Jean Yoon)