By David Dolan - Analysis
TOKYO (Reuters) - As Japanese stocks slide toward a 26-year low, the country’s big banks may soon need to raise more capital and could go cap in hand to the companies whose weak shares triggered the problem in the first place.
Tokyo’s three “megabanks” -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- dodged much of the subprime damage that leveled New York and London, but have been whiplashed by losses on massive stock holdings and a deep recession.
Unlike their Western rivals, Japanese lenders take stakes in their corporate clients to cement business ties, making bank profits sensitive to swings in equity prices.
The megabanks have already raised nearly 2 trillion yen ($20.5 billion), mostly through preferred securities. More will be necessary, analysts say, if the benchmark Nikkei makes a sustained drop below 7,000 from its current level of 7,175.
Japan’s biggest banks could need to boost their capital by anywhere between 13 billion yen and 190 billion yen for every 10 percent drop in the Nikkei, UBS analyst Nana Otsuki said in a note to clients.
Analysts say second-ranked Mizuho is the most likely candidate as it has the weakest Tier-1, or core capital ratio, and because of the big impact of stocks on its profits.
Top bank Mitsubishi UFJ is also a strong candidate to raise capital, after an aggressive $14.2 billion acquisition streak last year and given that it is also among the bidders for Citigroup’s local brokerage unit, Nikko Cordial Securities.
“The deciding factor will likely be the stock market,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
“We’re not at the stage where it is necessary to inject public funds or nationalize Japanese banks to ensure their survival. However, if their capital adequacy buffers disappear, they will no longer be able to increase their lending.”
Japan’s banks held 25.6 trillion yen ($263 billion) worth of shares as of end-March 2008, according to data from the Japanese Bankers Association. Since then, the Nikkei has dropped nearly 42 percent, implying a loss of nearly 11 trillion yen for the nation’s banks.
Mizuho has the highest “break-even point,” the level where it starts to book paper losses on stock holdings. The bank said its break-even as of end-September was 9,500 on the Nikkei.
Mitsubishi UFJ put its break-even at around 9,000 as of the end of December, and Sumitomo Mitsui estimates 7,500.
Mizuho also has the biggest potential equity losses, relative to operating profitability, said Ismael Pili, a bank analyst at Macquarie Capital Securities in Tokyo.
Mizuho spokeswoman Masako Shiono declined to comment about whether the bank was planning to further boost its capital, as did a spokesman for Mitsubishi UFJ. A spokeswoman for Sumitomo Mitsui said the bank was considering its capital strategy but had not made any decisions.
Concern about potential dilution from capital raising has hurt bank stocks, sending Tokyo’s bank index down about 20 percent so far this year, on top of last year’s 43 percent drop.
Japan’s government is worried. It could buy shares on the market to calm fears about the broader economy as sliding stocks erode banks’ capital, newspaper reports say.
But if banks are going to raise more capital, now is the time to do it, Macquarie’s Pili said.
“Capital is a scarce resource, and why not get it now? It’s a preemptive measure for a potential (further) global downturn, or domestic downturn,” he said. “You gain added flexibility to explore opportunities that may arise, namely acquisitions.”
All three megabanks are maneuvering for Citigroup’s Japanese brokerage, sources told Reuters last month, in a deal that could be worth more than $3 billion.
Europe’s largest bank HSBC launched Britain’s biggest rights issue on Monday, raising $18 billion to help it overcome losses in the United States.
Japan’s banks may have to pay more for their capital, due to tightening markets. Mizuho last month offered a hefty annual dividend of nearly 15 percent on an $850 million issuance of preferred securities.
“Raising capital is very expensive, but the alternative is to shrink the balance sheet ... and that means cutting a lot of credit to customers,” said Brian Waterhouse, a bank analyst at equity research firm Japaninvest. “That’s something clearly the government doesn’t want the banks to do.”
Japanese bankers say they now face more pressure from regulators to lend, especially to small and medium-sized firms.
As banks increase their lending, they have to boost their Tier-1 capital in order to cover potential defaults and meet regulatory guidelines.
Banks are also unlikely to issue dilutive common shares, Japaninvest’s Waterhouse said, after investors sent shares of Nomura Holdings down by nearly a quarter after it said last month it would raise $3.3 billion through new shares.
They are more likely to issue preferred shares to their corporate clients, said Shinichi Tamura, a bank analyst at Deutsche Securities, meaning they will raise funds from the very firms whose shares triggered the problem in the first place.
In any case, investors are unlikely to return to bank stocks, until they are more certain on the outlook for the equity market.
“Until the end of March share price is finalized, nobody can be sure,” said Deutsche’s Tamura. “So we always have to think about the possibility of capital raising.”
Editing by Dhara Ranasinghe and Ian Geoghegan