Deal to create world's largest bank

August 12, 2004

TOKYO (Reuters) - Japan's Mitsubishi Tokyo Financial Group clinched a deal Thursday to take over troubled UFJ Holdings Inc., edging out a rival in a takeover tussle to form the world's biggest bank.

But the country's third-biggest bank, Sumitomo Mitsui Financial Group, said it would press on with a rival bid for loss-making UFJ, whose market value is around $23 billion.

Under the terms of the deal unveiled in a joint statement, MTFG, the country's second-biggest bank, and fourth-ranked UFJ will form a holding company -- Mitsubishi UFJ Holdings Inc. -- to merge the two groups' holding companies, commercial and trust banks, and brokerages from October 1, 2005.

MTFG would be the surviving company, with shares in the new firm to be listed in New York, London, Tokyo, Osaka and Nagoya.

As part of the merger, two brokerage units, Mitsubishi Securities and UFJ Tsubasa Securities, are also to merge, creating Mitsubishi UFJ Securities Co. Ltd.

Current MTFG President Nobuo Kuroyanagi will be president of the new holding company, while UFJ Holdings President Ryosuke Tamakoshi will take the chairmanship.

The two banks said their merger will enable them to realize well-balanced loan portfolios, as 53 percent of MTFG's loans are extended to big firms and overseas, while 64 percent of UFJ loans are made to individuals and small businesses.

They also emphasized the benefits to their branch networks, with 77 percent of MTFG's domestic branches located in eastern Japan, while 62 percent of UFJ branches are in the central and western part of the country. But analysts said some benefits could be offset by risks.

"MTFG is strong in wholesale and UFJ in retail, meaning they have totally different business aspirations and skills to achieve their goals," said Yoshimasa Nishimura, a former Finance Ministry banking bureau head and now at Tokyo's Waseda University.

"There is no guarantee the new bank won't get bogged down in confusion as was the case for past bank mergers," he said.

The banks said they would set the merger ratios later, but Goldman Sachs analyst David Atkinson said he expected a merger ratio of between 2.2 to 2.5 UFJ shares for one MTFG share, valuing UFJ at up to $27 billion.

MTFG pulled ahead in the rare Japanese takeover battle when a court gave UFJ the green light to include its profitable trust bank in the talks with MTFG. UFJ's preferred merger partner then trumped SMFG with an offer to inject up to ¥700 billion, or $6.3 billion, into UFJ by the end of September.

An MTFG-UFJ combination would create a bank with assets of about $1.7 trillion, roughly equal to the gross domestic product of Britain and eclipsing current world No. 1 Citigroup's (C: Research, Estimates) assets of $1.3 trillion.

The takeover battle comes as Japanese banks clear up years of accumulated bad debts and seek new ways to boost profits to replace the slowing traditional corporate lending business.

If SMFG wants to stay in the race for UFJ, it must persuade UFJ and investors it can offer better value, analysts said.

"Sumitomo would have to come up with even more details of why they can pay more for UFJ than MTFG," said Graeme Knowd, senior credit analyst at UBS. "If they can't show why it is worth more to them, then it's done."

SMFG submitted a formal proposal last week offering more than ¥500 billion in capital and projecting annual cost savings of ¥200 billion for the merged entity. An SMFG-UFJ combination would command $1.6 billion in assets, also more than Citigroup.

The loser in the bid for UFJ would become a distant third in Japan behind the new entity and Mizuho Financial Group

With the options for SMFG narrowing, it may decide to merge with Sumitomo Trust & Banking Corp., with which it has close ties, in the bid to grow more competitive.

"One potential step is to integrate Sumitomo Trust or Mitsui Trust Holdings Inc. into its operations," said BNP Paribas Securities banking analyst Nozomu Kunishige.

"Unlike MTFG, Sumitomo Mitsui has no trust bank operations under its holding company structure and that has been considered one of the weak points."

UFJ has run up losses for the past three years and was the only big Japanese bank to post a loss in the April-June quarter due to bad loan costs.

Its core banking unit, UFJ Bank, has seen its capital adequacy ratio -- a key gauge of financial health -- fall to 8.19 percent as of the end of June, just above the 8 percent minimum required of banks operating globally.

UFJ shares closed up 1.85 percent at ¥496,000 after gaining 5.2 percent on Wednesday. MTFG shares, up 6.9 percent on Wednesday, closed unchanged at ¥1.02 million. SMFG shares fell 2.17 percent to ¥631,000 after Wednesday's 1.3 percent rise.

Home Loans Articles, Mortgage Loans Articles, Financial News