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Friday, March 12, 1999

Experts disagree on bank recapitalization impact

Staff writer

Friday's decision by the Financial Reconstruction Commission to infuse 7.46 trillion yen into 15 major banks marks what the government hopes will be a turning point for the nation's ailing banking sector.

But many experts remain skeptical over the banks' prospects. They wonder if the latest capital injections, to be completed by the end of the month, will help the banks write off all their nonperforming loans, as well as ease their tight lending stance, which has often been linked to the seemingly unending chain of corporate bankruptcies.

Yasuhisa Shiozaki, an Upper House lawmaker from the Liberal Democratic Party who helped write the recapitalization legislation last year, gives a relatively positive assessment of the government's scheme. He says the amount of public money used in the injections is large enough to give people the feeling that the problems of the banking sector will finally come to an end.

"The most important thing (the government had to do) was to send a clear signal that the financial system will really be bailed out," he said. "In that respect, I would say the scheme deserves 75 points (out of 100)."

Shiozaki added that the government will continue to apply pressure to banks through its purchase of preferred stock convertible into common stock.

Under the recapitalization scheme, the government will put 83 percent of its money into the banks' preferred stock, and the rest into their subordinated loans or bonds.

Common stock holders can more directly intervene in the firm's management than preferred stock holders because the former can exercise voting rights. In contrast, preferred stock gives shareholders priority over dividends, albeit without voting rights.

The period after which the government can convert its preferred stock into common stock -- a move that signifies stronger state control over the bank -- differs from bank to bank. Four banks -- Mitsui Trust & Banking Co., Chuo Trust & Banking Co., Toyo Trust & Banking Co. and Daiwa Bank -- will face the threat of conversion as early as July.

The remaining 11 banks plan to allow the government to obtain the option of conversion in two to 7 1/2 years.

Motohisa Ikeda, a Lower House legislator from the Democratic Party of Japan, disagrees with Shiozaki. He says the amount of recapitalization provided by the government is insufficient, adding that the banks have not made accurate assessments of their assets, including the extent of their sour loans. "The banks have not set aside enough loan loss reserves for their bad loans," he said. "Based on our party's own estimates, the major banks need at least 10 trillion yen more in capital to fully write off their bad loans."

Ikeda said he also doubts if the government will be able to recover all of the 7.46 trillion yen it pumps into the banks.

Along with their applications for public funds, the banks submitted individual restructuring programs to the FRC. The commission, based on its evaluation of these proposals, decided the banks' burdens, such as dividend rates and yields, should differ by bank, but nevertheless approved all 15 applications.

Ikeda maintains that the profitability of some of the banks is so low that the loans to these banks -- worth about 950 billion yen in total -- could sour.

"While the FRC once proclaimed that it would not let banks with little prospect of recovery exist, it has ended up doing so by approving their requests for public funds," he said. "Now the money given to these banks could go up in smoke, just as the money injected into Nippon Credit Bank and Long-Term Credit Bank of Japan last March became virtually irrecoverable."

Masaru Takagi, professor of economics at Meiji University, said that while he expects most of the banks' existing bad loans will be written off, they are still faced with the possibility of other loans going sour as the recession continues to sap the strength of the country's firms. He also cited the banks' exposure to Asian markets as a potential risk. Takagi added that the banks themselves are still not serious enough about restructuring.

For months, the FRC had reportedly pushed the nation's banks to reorganize through mergers and tieups, using the pending public fund infusions as leverage.

The banks, under pressure to convince the FRC or else face having their requests rejected, opted to take bold restructuring steps.

Their restructuring programs include a workforce reduction of some 20,000 in total over the next four years. Some banks have announced their withdrawal from overseas operations, reduction of branches and property selloffs.

Recently, some banks have also decided to eliminate their adviser positions, which are usually filled by retired executives, and have drawn criticism because the posts come with such perks as lifetime free use of a company car.

Takagi argues that all banks should move to abolish the practice. "Restructuring in the banking industry is lukewarm when compared with that of manufacturing firms, where restructuring is a matter of life or death," he said.

The banks' halfhearted attitude toward rebuilding is also reflected in their dividend payouts at the end of the current fiscal year this month, even though many are in the red, analysts say.

All 15 banks that are to receive public fund injections will post pretax losses ranging from 57 billion yen to 732 billion yen for the business year ending this month.

Katsuyuki Kumagai, general manager of the information department of the private credit research firm Teikoku Data Bank, is pessimistic about the injections of public money easing the banks' stringent lending stance. He expects many firms' difficulties in securing funds to worsen instead.

In February, the FRC categorized 853 borrowers of the now-nationalized LTCB as bad, signifying that those borrowers will have their loans from the bank discontinued.

Kumagai said he is worried that the banks that receive capital injections this time will likewise decide to terminate their loans to many firms. "I fear that the number of bankruptcies will inevitably rise toward the end of the business term."

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The Japan Times

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