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Friday, January 17, 2003

Japanese Banks Get Nervous about their Capital Adequacy Ratios

The plan announced Wednesday by Sumitomo Mitsui Financial Group to issue 150 billion yen worth of convertible preferred shares to Goldman Sachs is expected to lead to similar moves by other Japanese banks seeking to raise capital before the fiscal year ends March 31. According to Japanese sources, banking groups including Mizuho Holdings, UFJ Holdings and Resona Holdings are all considering jumping on the capital-raising bandwagon, with their plans to raise capital expected to be announced as early as the end of this month. The Goldman Sachs deal, widely interpreted in European and American news media as an indication of renewed confidence in the Japanese banking sector seems to have more to do with paying an increased risk premium to secure a cash injection and avoid government control. With banks, and many of their non-performing loans being back by goverment guarantees Goldman Sachs in fact seem to be risking little.

As SMFG President Yoshifumi Nishikawa explained during Wednesday's press conference, the current harsh domestic business environment prompted the group to "rely not on (our) clients, but to improve our capital base independently," with help from a major U.S. investment bank. The sluggish domestic stock market was a major factor in SMFG's decision not to issue shares to Mitsui and Sumitomo group companies as well as to other clients, the sources said.

SMFG will pay Goldman Sachs an annual 4.5 percent cash dividend on its preferred shares, more than triple the dividend the group pays to the government for the preferred shares it received in return for an injection of public funds in 1999. Although Nishikawa defended the large dividend payment promised Goldman Sachs as the result of "changes in the market environment," claiming the amount was "adequate given current conditions" as compared with 1999, analysts said the decision reflected Japanese banks' weakness in both financial management and credibility. UBS Warburg analyst Katsuhito Sasajima said, "(SMFG) must have decided to resort to all possible means to avoid another injection of public funds."
Source: Daily Yomiuri

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