Japanese Banks Must Improve Shareholder Relations in Order to Expand

Strong market conditions often present great opportunities to raise much-needed capital for both the ambitious and the struggling. But while opportunities for extra liquidity abound, you can get punished for taking the practice to its extreme.

Japanese broker Daiwa Securities (DSECY) dropped 12 percent early yesterday in Tokyo after it announced it would raise $2.5 billion through its first equity offering in 20 years. The firm said it would use the money in order to expand operations in a 345 million new-share issue which could dilute existing shareholders by as much as 25 percent.

And Ashikaga Holdings, a lender acquired by Nomura (NMR) earlier this year, will be spun off by the bank into an IPO as soon as 2010, according to Bloomberg. Not to be outdone, Mizuho (MFG) is eyeing a giant ¥600 billion ($6.5 billion) fundraising exercise this week.

It has been pointed out at BNET Finance before, how Japanese banks are looking to convert themselves from hierarchical deposit-taking institutions into lean, pan-Asian, multi-national investment banks. Indeed, just look at Sumitomo’s (SMFJY.PK) relationship with Goldman Sachs (GS), in which it is a major shareholder, or Mitsubishi UFJ’s (MTU) strengthening ties with Morgan Stanley (MS), and the point couldn’t be clearer.

Still, Japanese banks ought to be aware that if they pursue growth plans too swiftly for the comfort of domestic market conditions, their big ambitions may not even get off the ground.

“Investors are particularly sensitive about equity offerings by financial institutions,” Hitoshi Yamamoto, chief executive of Fortis Asset Management Japan, told Reuters yesterday morning. “Their business outlook still remains unclear and a large equity offering is a negative news.”

In the process of expansion, it pays to be sensitive to the sentiments of your backers. If Japanese banks pursue their goals for global domination of the financial services industry at the expense of their shareholders’ heightened nerves, that will just put them back at square one.

Japanese firms are notorious for being shareholder-unfriendly. Turning that culture on its head may turn out to be the biggest hurdle for the nation’s ambitious banks.

Comments

[Mad Hedge Fund Trader]

They sure do, if they are going to survive. It’s sad to see a once great country fall on hard times. It’s like watching a formerly leading hedge fund manager apply for food stamps. I’m talking about Japan, which in 1989 boasted the world’s most valuable stocks, largest banks, and strongest currency. Oh, how the mighty have fallen. This week the Ministry of Finance published the trade figures for May showing a 42% YOY drop, and that the cataclysmic fall in exports continues unabated, as foreigners keep their money in their pockets instead of buying high quality cars and electronics. Even exports to China fell 29.7%. I’m sure the chart below will be found in business school textbooks for decades to come as proof of the risks of running an overly export dependent economy. Although a giant fiscal stimulus package will start to hit in the second half of this year, most economists have GDP forecasts for the year of minus 6.8% or worse. This would take GDP back to the 2004 level, and make our economy look positively bubbliscious by comparison. This is all happening when the numbers of those retiring is going through the roof, causing welfare payments to skyrocket. Taking a page out of Obama’s playbook, the government is borrowing to meet these costs, so the national debt is expected to reach the certifiable nosebleed territory of 197% by next year! Prime Minister Taro Aso has so far fought off increased consumption taxes, but it is just a matter of time before those efforts are tossed out the window. Continued deflation is a no brainer. Real estate prices are still stuck at 30% of their 1990 levels. This is what an “L” shaped recovery looks like up close and ugly. In the meantime, the yen strengthens, making exports ever more expensive and uncompetitive. Better to stand aside from the Land of the Rising Sun and watch with tears. Is the US next?

2009 Jun 30 10:24 AM