Megabanks set example to Japan Inc. on share sales

November 16, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Where Japan’s top lenders lead on selling equity stakes, others ought to follow. The country’s three “megabanks” – Mitsubishi UFJ, Mizuho, and Sumitomo Mitsui – have announced plans to slash their holdings in client companies. It will be even better if smaller banks and non-financial outfits follow suit.

The three big lenders were prodded into action by Japan’s Financial Services Agency, which is worried about the size of their equity holdings compared to global rivals. A stock market crash could make the banks less willing to lend precisely when the economy needs it most. Hence the major divestment plans, unveiled on Nov. 13. Mizuho has 1.96 trillion yen ($16 billion) tied up in domestic equities, on an acquisition-cost basis, and could shed 40 percent of this in time. Sumitomo Mitsui will cut its holdings to 14 percent of Tier 1 capital, from 28 percent, over a half-decade. Mitsubishi UFJ will scale back to 10 percent of Tier 1 from 19 percent.

This should not unbalance investee companies too much. Some could buy back their stock from the banks, lifting return ratios and free floats. The state-backed Banks’ Shareholdings Purchase Corporation (BSPC) could mop up some supply. And there should be three big benefits. Banks will less exposed to market cycles. Shedding unproductive holdings should boost their return on equity, a key measure in the shake-up of corporate Japan. Shorn of big shareholders, the portfolio companies will be forced to listen more to regular investors.

The plan fits neatly into Prime Minister Shinzo Abe’s reform drive, and the recently introduced corporate governance code. But cross-shareholdings were already waning. Listed companies, excluding insurers, owned 11 percent of Japan’s stock market last year, Nomura reckons. Though that’s a meaningful amount of capital tied up in other listed groups, it is far below the 34 percent seen in the early 1990s.

Moreover, the megabanks are not even the biggest offenders. Smaller institutions can be worse: Bank of Kyoto holds more than its own market value in equity stakes, CLSA figures show. Plus non-financial corporations – which often hold stakes in suppliers, customers, and others – actually own a bigger proportion of the market than banks, Nomura says. Unwinding holdings without causing offence can be a delicate matter. But there is clearly some way to go.

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