Tokyo banks poised to step up cuts to US$65bil stock hoard

Japan's top financial regulator has pressured property-and-casualty insurers to cut their holdings and the banks will probably follow in this direction. — Bloomberg

TOKYO: For decades, banks in Japan have clung to a network of cross-shareholdings that date to the nation’s industrial emergence from World War II, helping companies expand globally and ride out periods of economic hardship.

Now, expectations are growing for a more rapid sell-down of the equity stakes.

The nation’s top financial regulator has pressured property-and-casualty insurers to cut their holdings and the banks will probably follow in this direction.

“This year will see a second wave of unwinding of cross-shareholders – which will likely include insurance companies and banks too,” Rie Nishihara, chief Japan equity strategist at JPMorgan Chase & Co, said in an interview.

Japan’s three biggest lenders – Mitsubishi UFJ Financial Group Inc (MUFG), Sumitomo Mitsui Financial Group Inc (SMFG) and Mizuho Financial Group Inc – held about 9.8 trillion yen (US$64.7bil) of cross-shareholdings as of March 2023. These include about US$5bil in Toyota Motor Corp, one of the world’s biggest carmakers.

Nomura analyst Ken Takamiya said in a March 18 note that it’s possible banks may accelerate their selling.

With Japan’s historic scrapping of negative interest rates complete this month, the next catalyst for bank stocks will be this unwinding, said Hiromi Ishihara, head of equity investment at Amundi Japan.

For years, bank executives have privately pointed to the difficulties in selling, saying corporate clients will move business to rivals if the lenders dare to offload shares.

That’s now changing due to greater pressure from shareholders such as global asset managers, a situation unimaginable just five years ago, according to a senior executive at one of the megabanks.

MUFG’s US$2.5bil stake in Toyota is closely entwined with the history of the two firms.

The bank played a key role in the carmaker’s international expansion in the 1970s, when Toyota was the most important customer of Tokai Bank, one of the lender’s forerunners, according to the International Directory of Company Histories.

During this period, the industrial giant also became Tokai’s largest shareholder. Tokai Bank merged with Sanwa Bank, another key Toyota shareholder, to form UFJ Holdings in 2001, a predecessor to MUFG.

But late last year, Toyota said it would lower its stake in a supplier and review its other cross-shareholdings, freeing up money that can be used to fund a shift to electric vehicles. That may also open a way for banks to reduce their holdings in the carmaker.

In addition to Toyota, Japan’s three biggest lenders also have large holdings in air conditioner maker Daikin Industries Ltd and Itochu Corp, a general trading company handling textiles, machinery and chemicals. Some of their client companies also hold stakes in the banks.

Toyota will consider appropriate measures – examining various factors such as the manner and timing of a sale – if banks approach them about unloading their stakes, a spokesperson said.

Daikin will engage in discussions when approached for potential sales by holders, a spokesperson said. An Itochu spokeswoman said her company is not in a position to comment on its shares held by banks.

MUFG, the country’s biggest lender, said that the unwinding of cross-shareholding could make further headway, given a growing awareness among firms for the need to improve capital efficiency, according to a spokesperson for the lender.

“Currently, there are cases in which we are getting approval from companies that used to see the importance of the cross-shareholdings,” the spokesperson said.

An SMFG spokesperson said the bank has been reducing its strategic holdings at a faster pace than planned, and it will continue these efforts in coming years.

A Mizuho spokesperson said her bank has been reducing strategic shareholdings and will continue to negotiate with clients.

At stake is the transfer of decades-old ownerships in some of Japan’s biggest companies, as well as a boom in business for investment banks helping to manage the divestitures. Still, any transaction needs to be handled delicately so that it doesn’t damage relationships with key clients.

The issue of cross-shareholdings gained renewed attention following drastic measures taken by the country’s property-and-casualty insurers in the wake of a price-fixing scandal last year. — Bloomberg