Bigger does not inevitably mean better in Japanese bank mergers, Standard and Poor's warned Tuesday as three lenders prepare to launch the world's largest financial institution this week.
Japan's top banks, struggling to shake off huge bad loans after a decade-long economic slump, were being over-optimistic about the benefits of consolidation, the New York-based credit risk appraiser said.
Consolidation was "no cure-all for Japanese banks," said a report by Standard and Poor's chief financial analyst in Tokyo, Naoko Nemoto.
"Risks inherent in consolidation, such as culture clashes between diverse organizations and lack of management integration, are potentially high," she said.
Merger risks include hidden debts which banks have not come clean about, Nemoto said.
"In particular, banks need to write off problem loans, reduce inherent risks on large investment stock portfolios, diversify their revenue sources, and improve profit margins while implementing better risk management."
Japanese banks preferred to merge as equals, ensuring no one was in sufficient charge to take difficult choices on how to make operations more efficient, the analyst said.
In addition, little public consideration had been given to the costly business of integrating computer systems at different banks.
"Management will need to exercise strong leadership in dealing quickly with difficult problems," Nemoto said.
"In particular, old customs that have prevented the closure of non-profitable businesses and the liquidation of loss-making subsidiaries need to be abandoned."
The warning came as Fuji Bank Ltd., Dai-ichi Kangyo Bank Ltd. and Industrial Bank of Japan Ltd. plan to launch Mizuho Holdings Inc. on Friday.
Japan's first bank holding company will be the world's largest financial institution with total assets of 141 trillion yen ($1.3 trillion), and will join a worldwide trend for banks to come together.
Last Wednesday Chase Manhattan Bank agreed to acquire J.P. Morgan in a stock swap valued at $32.9 billion, uniting two of the most prestigious names in US banking.
But analysts have been united in bemoaning Japanese merging banks' failure to face up to the hard choices being taken by their overseas rivals.
"Japanese banks financial profiles are well below the international average," the Standard and Poor's analyst said.
"They need to improve their performance, rather than expanding the size and scope of their businesses."
Bank of Tokyo-Mitsubishi Ltd. and its alliance partners, however, said on September 13 they planned to shed 3,000 jobs, cut costs and make big profits under new holding company Mitsubishi Tokyo Financial Group Inc.
The alliance, due to start operations on April 2 next year, will bring together Bank of Tokyo-Mitsubishi, Mitsubishi Trust and Banking Corp. and Nippon Trust Bank Ltd.
But none of the new Japanese groups was observing a golden rule of successful bank mergers, said ING Barings financial analyst James Fiorillo.
"Build a specialty first, then choose a partner who adds value to your strategy," he said in a report.— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com )