Banking 'Godzilla' with big assets, and biggest debt

By F. J. Khergamvala

TOKYO, OCT. 4. The world's largest banking group by assets, Mizuho Holdings, began its operations this week under close public scrutiny about its future.

The Mizuho Securities Co and the Mizuho Trust and Banking Co., both amalgamating the trust banking and the securities arms of three big financial and brokerage houses, opened their doors on Monday thus marking a significant milestone in the collapse of the traditional borders distinguishing the various keiretsu.

The businesses of Dai-ichi Kangyo (DKB), Fuji Bank and Industrial Bank of Japan (IBJ) came together to help form what some have dubbed the banking godzilla, with total assets of 134 trillion yen (about $1.25 trillion), overtaking Deutsche Bank. Mizuho, literally 'bountiful rice harvest', becomes the country's first combined financial company and a pioneer in the reorganisation of the banking sector, where the trend may be of creating more such behemoths.

A shakedown is taking place in the country's banking and the insurance sectors, with domestic and international mergers. It is unclear though how the new group will evolve in the relationship of its three components to their present associate life and non- life insurance companies. At present, Mizuho's plans do not include taking any life or non-life insurance company under the umbrella of the holding company.

The planned integration of the three institutions into establishing a holding company goes well beyond the requirements of government arm twisting. The government practically pre conditioned the lending of public money to banks which seriously planned to merge.

Thus, together with the combination of the strong points of each of its components, Mizuho also inherits their repayment burdens, perhaps the largest in the world.

They have cumulatively borrowed over $26 billions for recapitalisation from the government. Mizuho itself has a strong domestic base with commercial loans at over 28 trillion yen and individual deposits of over 31 trillion yen.

According to Mr. Katsuyuki Sugita, President and Chief Executive Officer, bad loans worth about 4.74 trillion yen are just five per cent of the group's lendings and therefore certainly not worse than other Japanese institutions.

What he did not say is that the corporate borrowers of the three banks include many construction and real estate companies that were given money because of political considerations.

Mizuho has set itself an initial target of 10 per cent on return of equity. Foreign banks' return on equity (ROE) averages over 10 per cent, with some reaching 20 per cent, while Mizuho's ROE for the current accounting period is 4.2 per cent, with one account putting it at 3.8 per cent. This low ROE is the result of lending to companies with poor credit ratings. The target of 10 per cent plus ROE, however, also depends on the pace of economic recovery and interest rates and its own streamlining measures.

Japanese banks are not particularly reputed for personnel slashing at home as part of their overall reform. But, if it is to achieve its ambitious goal of becoming among the world's five largest banks in profitability, Mizuho will have to deliver on its plans to cut its manpower by a fifth over the next seven years. Mr. Sugita believes that the group will begin showing profits in five years. Full integration of the three components, according to Mr. Sugita, should be achieved by the end of April 2002. Mr. Sugita, who is President of DKB, said the group will issue joint credit cards, open automatic teller machines for each other and introduce new financial services.

In fact, analysts believe that in addition to a vast customer base, the full range of financial functions the group offers is a great asset that needs optimisation through greater efficiency.

The market's verdict seems to echo what the Nihon Keizai Shimbun editorialised. It called the creation of Mizuho a beneficial development but added, ``that does not mean the prospects for the group becoming a formidable competitor in the global banking scene are necessarily bright.''

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