BANK OF TOKYO-MITSUBISHI JOINS MERGER
--- by Douglas Ostrom
The April 19 announcement that Bank of Tokyo-Mitsubishi, Ltd. Japan's biggest and healthiest financial institution would combine with Mitsubishi Trust & Banking Corp. under a holding company framework as well as the April 21 release of additional details concerning the pending merger between Sakura Bank, Ltd. and Sumitomo Bank, Ltd. shed further light on the motives behind the ongoing restructuring of Japan's banking industry (see JEI Report No. 12B, March 24, 2000). Public explanations have attributed the tie-ups to the desire to cut costs and create synergies in the introduction of new products. However, the more significant factor appears to be purely defensive and involves preventing interlopers, foreign and domestic, that otherwise could obtain relatively cheap admission to the banking business from moving into the market and constraining the efforts of Japanese financial institutions to improve their anemic profit margins.
The BTM/Mitsubishi Trust combination, which is scheduled to take place April 1, 2001, is difficult to explain on any other grounds. The two banks' businesses overlap little and furnish few opportunities for synergies. Mitsubishi Trust, which ranks first in its field in terms of assets, primarily offers trust services, although it also is a longtime provider of basic banking services. BTM's trust business is in its infancy. Were the two banks not forming a holding company, Mitsubishi Trust and its underdeveloped network of branches might have become a relatively low-cost point of entry into the banking industry for an outsider, which could have used this infrastructure to develop into a potential rival to BTM. The tie-up surprised some analysts in part because BTM was thought to be still adjusting to its creation from the 1996 merger of Bank of Tokyo, Ltd. and Mitsubishi Bank, Ltd.
The announcement that Sakura Bank and Sumitomo Bank would advance the effective date of their merger by a year to April 1, 2001 was less important than the simultaneous disclosure that the new entity would be called Mitsui Sumitomo Bank, Ltd. The name reflects the future partners' origins in the Mitsui and Sumitomo zaibatsu, the prewar predecessors of keiretsu (corporate groupings) (see JEI Report No. 14A, April 7, 2000). When Mitsui Bank, Ltd. and Taiyo Kobe Bank, Ltd. combined in 1990, "Taiyo Kobe" came first in the domestic rendering of the name, while "Mitsui" took precedence in the English-language version. The confusion ended in 1992 when the bank changed its name to Sakura Bank.
But, much to the irritation of Mitsui Group members, the clarity came at the expense of the bank's Mitsui identification. At least one group company, Mitsui Marine & Fire Insurance Co., Ltd., had deliberately chosen to identify itself as a Mitsui firm in changing its moniker from Taisho Marine & Fire Insurance Co., Ltd. in 1991. The proposed bank's name not only restores "Mitsui" to the title, but also puts it first at home and abroad, ahead of that of longtime rival Sumitomo Bank.
The acceleration of the timetable for the formation of Mitsui Sumitomo Bank does not mean that the merger is proceeding without a hitch. The decision on the base of operations for the new entity clearly reflected a delicate compromise. Its primary headquarters will be in Tokyo, Sakura Bank's home and a natural location for a multinational bank. That also was the site of Mitsui Bank's head office. But the financial institution also will retain important functions in Osaka, Sumitomo Bank's headquarters, as well as in Kobe, where Taiyo Kobe had its central office.
Moody's Investors Service Inc. provided another indication April 24 that all will not be smooth sailing. The influential credit-rating firm announced that it was upgrading the creditworthiness of some of Sakura Bank's debt, reflecting its earlier-than-anticipated merger with the healthier Sumitomo Bank. More significantly, at least to Japanese analysts, Moody's downgraded Sumitomo Bank's financial strength rating, the broadest measure of a bank's health, to E+, which is close to rock bottom. Sakura Bank's rating, already at E+, was left unchanged. Moody's defines a bank rated E as possessing "very weak intrinsic financial strength, requiring periodic outside support or suggesting an eventual need for outside assistance. Such institutions may be limited by one or more of the following factors: a business franchise of questionable value; financial fundamentals that are seriously deficient in one or more respects; or a highly unstable operating environment."
Although the megamergers announced to date may have few positive effects on the overall financial health of Japan's still-ailing banking system, they do illustrate the enduring power of intra-keiretsu ties. The return of the "Mitsui" name is one indication of the strength of these relationships; previously announced tie-ups between Sakura Bank and Sumitomo Bank nonbank financial companies are another. Further evidence comes from BTM's announcement of a merger with a fellow Mitsubishi keiretsu firm and its call for Mitsubishi Group members Meiji Mutual Life Insurance Co. and Tokio Marine & Fire Insurance Co., Ltd. to join the holding company. Meiji Mutual Life was reported to be considering the proposal, while Tokio Marine appeared to reject the idea, but Japan's top property and casualty insurer did say that it would maintain close ties with the entity created by the combination.
These moves are consistent with the ongoing consolidation of the Japanese financial system. Four large banking groups will emerge from this process: BTM/Mitsubishi Trust, Sakura Bank/ Sumitomo Bank, Sanwa Bank, Ltd./Tokai Bank, Ltd./Asahi Bank, Ltd. and the Mizuho Financial Group, to be created from the merger of Dai-Ichi Kangyo Bank, Ltd., Fuji Bank, Ltd. and Industrial Bank of Japan, Ltd. Corresponding keiretsu nonbank financial companies also are merging or otherwise combining, potentially creating four huge, one-stop financial supermarkets. In this sense, the old keiretsu relationships are becoming stronger in the face of the financial liberalization that was expected to weaken them. Yet nonfinancial keiretsu businesses may have fewer ties with their keiretsu brethren than in the past for a variety of reasons, not the least of which are the increasing links between these concerns and foreign companies.
Will the new architecture work? Banks and other financial institutions in Japan long have been less profitable than their offshore competitors. Industry analysts in particular are looking for a much-improved financial performance once all the mergers are completed. Indeed, without the prospect of a bigger bottom line, the pending tie-ups would make little sense.
Absent greater revenues, however, the new entities will not be much more profitable than their predecessors since the cost savings will be minimal. Higher profits could come because customers are willing to pay more to obtain what in effect contributes to a better product: the convenience that results from having fewer financial institutions with which to deal. American experience suggests that this premium may be very small. Moreover, the Internet, by making certain financial services more accessible to consumers, may reduce it further. In any event, in terms of one-stop shopping, Japanese financial institutions are far behind their U.S. counterparts.
If the pending bank combinations deliver neither significantly lower costs nor improved products, higher profits will have to come from reduced competition. Going the merger route allows commercial banks such as BTM to head off potential challengers like Mitsubishi Trust, whereas mergers between current rivals directly and immediately reduce competition. Perhaps more significantly, by sweet-talking nonbank financial companies into joining them, banks may succeed in limiting the impact of a major thrust of the Big Bang financial restructuring effort the creation of new rivalries among insurers, brokerages and banks.
At the end of the day, therefore, Japan may be left with a small number of financial services providers in each area, with little rivalry across industries. That would imply less competition overall. In the case of banks, fewer firms may mean higher interest rates on loans and even lower returns on savings. Normally, such a squeeze play persuades customers to search for alternatives, but the potential for substitution will be limited by the consolidation going on in Japan's financial sector.
Foreign financial services firms, already salivating at the size of Japan's market, would see even better business prospects there if their counterparts were earning real money. They have to hope that Japanese financial institutions succeed in their search for profits, the doubts of Moody's and other skeptics notwithstanding, and that points of entry survive. But, since profits seem to depend on choking off actual or potential rivalry, that expectation may not be realistic.