The future business of Yucho Bank, the unwieldy beast that emerged from the privatisation of Japan’s postal system, is unclear and it faces hostility from private players. Charles Smith reports from Tokyo.
“It will be the first and last project of this kind in the world,” says Mitsuyoshi Okano, president of Suruga Bank, a medium-sized regional bank outside Tokyo that is famous for its innovative retail lending, including the first housing loans ever offered in Japan’s male-dominated business world to single working women.
The project that Mr Okano (whose slogan as president of Suruga in the past 23 years has been “first entries for ever”) is talking about is not a new loan product pioneered by his own bank, however, but Yucho Bank (aka Japan Post Bank), the unwieldy behemoth that emerged on October 1 last year as one of the four privatised successors to the state-owned postal system. Yucho’s assets include 24,000 post offices, 20% of the outstanding issue of Japanese government bonds (JGBs) and ¥180,000bn ($1,800bn) worth of customer deposits. That last figure is 80% ahead of that at the Bank of Tokyo-Mitsubishi UFJ, which was Japan’s largest bank before Yucho debuted last autumn.
Yucho’s form
Yucho has been privatised only in a strictly legal sense. It became a limited liability company in October and its staff are now company workers instead of government officials. But 100% of its shares are owned by Co, which in turn is wholly owned by the finance ministry.
It is also less than a fully fledged commercial bank, in that any business it enters, apart from collecting deposits, buying government bonds and selling mutual funds, requires a licence from the Financial Services Agency (FSA) and the Ministry of Internal Affairs and Communications (MIC). The two ministries, in turn, act only after receiving advice from a supposedly neutral privatisation committee, whose brief includes not allowing the bank to disrupt financial markets.
From the viewpoint of nervous and mostly hostile private banks, all that might seem to make Yucho a caged beast, rather than an active menace. But the bank does pose an array of questions about the future of Japan’s financial system that are a matter of disturbing guesswork even for advocates of privatisation. The most immediate point is that Yucho has to be let out of its cage in the not too distant future.
The privatisation law that changed the bank’s legal status last autumn also requires that Japan Post Holdings sells all its shares in Yucho within 10 years. To meet the deadline, Yucho is targeting an initial public offering (IPO) of about one-third of the government shareholding by the end of 2010, with the rest to be unloaded about five years later.
At a price-to-book ratio of one, Hiroshi Yamada, Yucho’s managing executive in charge of accounting and finance, estimates that an IPO of 30% of the bank’s shares would be priced at about ¥2400bn ($24bn). This would be comfortably larger than the previous record in Japan, the ¥2150bn IPO of mobile phone giant NTT DoCoMo in late 1998. Yucho Bank might not be facing the markets alone; its sister company Kampo Semei, the former postal insurance unit and now Japan’s largest life insurance company, is subject to the same 10-year rule on full privatisation and might face the market at about the same time.
Nobuyuki Kinoshita, a senior official at the FSA who is serving as secretary-general of the postal privatisation committee in the cabinet secretariat, says that to make the Yucho and Kampo offerings acceptable to investors, the Post Holdings company might also need to offer a slice of its own shares to the market. If it does not, warns Mr Kinoshita, investors might worry about the possible transfer of some of Yucho’s profits to Japan Post Network, which runs the 24,000 national post office network. The conclusion is that investors might need to absorb three big postal IPOs near the end of the decade.
Crucial move
Of the three IPOs, Yucho Bank’s is crucial because it will need to establish a track record before it can raise a yen from investors. The Tokyo Stock Exchange (TSE) normally requires three years of profit and loss figures from companies applying to list for the first time. Mr Yamada says the bank will demand that the TSE consider the pre-privatisation record of the post office as part of the record.
Hironari Nozaki, senior bank analyst at investment bank Nikko Citigroup, is certain that the TSE will agree because it would welcome a Yucho listing, But he says that the big question is whether Yucho will be able to come up with an “equity story” that will please the market. If it does not, there is a possibility that privatisation will not go through.
The difficulty in compiling that story is clear from a comparison of Yucho’s past and its aspirations for the future. As a member of the state-run postal system, Yucho functioned as a subsidised channel for transferring cash from the pockets of individual savers to the Fiscal Investment and Loan Programme (FILP), a now-extinct government entity that financed public works programmes. The loans were risk free because any losses by FILP projects were covered with funds from the main national budget and the post office was guaranteed an attractive rate of return based on the yield on 10-year government bonds topped up by a 0.2% premium.
The postal system’s deposit base relied on a unique 10-year fixed rate deposit that is withdrawable at sight after six months. The so-called teigaku chokin, which still accounts for 70% of Yucho’s total deposits, was irresistibly attractive to savers in the early 1990s, when Japan’s market interest rates were falling fast but income from savings could be locked in for a decade by making government-guaranteed fixed-rate deposits with the post office.
Today the interest rate on teigaku chokin is below that for ordinary time deposits at commercial banks that lack the put option offered by Yucho. That explains why post office deposits have been falling steadily since reaching a peak of ¥260,000bn in 2000.
But the combination of about ¥130,000bn of surviving fixed-rate term deposits on the liability side of Yucho’s accounts with ¥135 trillion worth of government bonds on the asset side, sets up a potentially disastrous asset liability imbalance. Disaster could be unleashed, say analysts, if a rise in yen interest rates depreciates the value of Yucho’s bonds while depositors in fixed-rate teigaku chokin begin shifting large amounts of funds to instruments offering more attractive returns.
Risk time bomb
“What the asset liability management (ALM) situation means is that the biggest financial institution in Japan also carries the biggest risk, so it is fair to call it systemic,” says Shinichi Ina, bank analyst at Credit Suisse Securities (Japan). Tsutomu Okubo, a former Morgan Stanley Japan executive who now sits in the upper house of parliament for the opposition Democratic Party of Japan, sees the ALM time bomb at Yucho as a reason why the Bank of Japan cannot afford to raise interest rates. Luckily, it does not need to do so at present, but Mr Okubo’s worry is that a run on Yucho’s teigaku chokin deposits could force the bank to take losses on a devalued bond inventory. He estimates that if interest rates rose by as much as 10 basis points, Yucho would suffer paper losses of ¥400bn.
Nobuyuyki Kinoshita, in the Cabinet Secretariat’s privatisation office, says the ALM problem at Yucho is a “core issue” and is a reason why one of the most urgent problems facing the privatised bank is to diversify its investments.
Yucho’s Mr Yamada says that this is already happening. He claims 40% of Yucho’s bond holdings now have maturities of less than one year; but he does not comment on Mr Okubo’s estimate that the average maturity of the bond portfolio is four years.
Tentative start
Not surprisingly, the investment sector, including participation in syndicated loans, was the area that the FSA picked when it issued Yucho with its first new business licence at the end of 2007. Since receiving the licence, the bank has taken a ¥500m slice in a ¥16bn syndicated loan to Nippon Steel Corporation, managed by Mizuho Corporate Bank. That is a very tentative start. Yucho’s eventual aim is to join about 12 big syndicated loans a year.
Investment, not just in syndicated loans, but in equities, corporate bonds, securitised products and derivatives, is the first leg of the new Yucho business model and, as of late March, the only one that the bank could implement. The other crucial but so far unexplored sector is loans. At the end of its last business year (March 2007), the former postal bank had ¥52,000bn worth of risk-free loans outstanding to government entities, but that figure will shrink to zero as the last such loan matures in three years’ time. So the bank urgently needs to learn how to make a living as a commercial lender.
Yucho has no experience in risk assessment, however, and any attempt to enter the huge domestic corporate loan market would set virtually the whole Japanese banking industry against it. The solution is to concentrate on retail lending and enter the market cautiously, first by acting as an agent for commercial banks and only later attempting to sell its own loans.
The bank launched its loan strategy last September by offering to distribute housing loans for 11 major regional banks, using about 50 branches, mostly located in big cities. (Yucho’s directly owned branches number a fairly modest 234, although the full postal network of 24,000 post offices performs some basic financial services on behalf of the bank, including deposit collection and withdrawal). Of the 11 banks it approached, 10 turned it down, reflecting the prevailing consensus among regional banks that postal privatisation could damage their business. The exception was Suruga, a maverick bank located south-west of Tokyo, which has turned itself into a retail loan specialist serving the whole of Japan, rather than a full-service bank operating in a single prefecture, like the majority of regionals.
Suruga deal
Suruga prides itself on offering a menu of 30 home loans to different kinds of borrowers and 20 types of card loan, most of which are available from no other bank. It agreed in late September to help Yucho distribute its new line in mortgages for single working women. Other banks had overlooked this market, although several have since announced copycat products. Suruga began training Yucho loan staff in the basics of handling loan applications in February and will post one of its own staff to each of the 50 Yucho branches when the loans come on sale in May or June.
All of that, though, depends on the FSA allowing Yucho to enter the loan market, a matter that the agency was still pondering in late March. The FSA says it needs to be convinced that Yucho has control and checking procedures in place before it gives the go ahead. As part of a huge government agency, Yucho began life as a private entity with a full set of bureaucratic controls designed to prevent official malpractice, but virtually none of the disclosure and accounting procedures that the FSA thinks it needs as a commercial bank.
If Yucho manages to make a start as an agent for individual loans generated by friendly banks such as Suruga, the next step will be for it to start generating its own loans. Mr Yamada says that the bank hopes to do so within the next year, but he agrees that Yucho needs a big influx of experienced staff to function effectively. The recruiting drive is already at full speed.
At the top
The president of Yucho Bank, Shokichi Takagi is a former commissioner of the FSA, but Mr Yamada joined the bank from Mitsubishi Corporation, a big general trading company. In the bank’s asset management division, which is crucial for diversifying away from the current heavy dependence on Japanese government bonds, Mr Yamada says that 12 out of 13 senior managers were recruited from outside the post office.
Yoshifumi Nishikawa, a former CEO of Sumitomo Mitsui Banking Corporation, the third largest mega bank, is the CEO of Japan Post Holdings Co, which owns the whole of Yucho Bank. He also serves as an outside director of Yucho. His dominant personality makes it almost certain that he has had a big say in setting the main lines of the bank’s strategy.
Corporate loans
If Yucho makes a successful start in retail lending about a year from now, what else will it do to justify its vast resources? One of the areas that the bank says it has no plans to enter is direct corporate lending, although this was included in the menu of possible businesses when the bank first sketched out a business strategy before it was privatised.
It is plain to see why this sector has stayed off limits. The 109 regional banks that dominate banking business in all of Japan, except the big urban areas of Tokyo, Nagoya and Osaka, depend heavily on lending to small and medium-sized enterprises and have been vigorously lobbying the government to keep Yucho off their territory.
The three mega banks that dominate big company lending and retail business in Tokyo are less hostile and in some cases friendly to Yucho. But this appears to be on the assumption that Yucho will lend to their big corporate clients only as a syndicate member, not by cultivating direct relationships with companies.
If virtually the entire world of corporate lending is closed to Yucho, what business could justify the bank’s enormous size – even if, as it claims, it will eventually shrink deposits to much less than the official target of ¥170,000bn? Mr Yamada’s answer is that Yucho will create a “completely new” business model: providing a full range of retail services through much of the 24,000 post office network and, in the process, spread its net more widely than any other bank in the world.
“Our portfolio of services will match the attitude of customers,” says Mr Yamada. “They’re very conservative now, but if they want more risky products we can provide those too – including equities or investment trusts from all over the world.”
Post offices will handle the paperwork but everything else will done at Yucho operations centres located around Japan, he says. Yucho will have to sign contracts with post offices that belong to a different part of the post office family from the bank, and will pay fees for their services. Mr Yamada does not deny that other banks, including megas, can try to do the same. “But only we have the same IT system as the post offices. In fact, our system will be unique,” he boasts.
Glorious or desperate?
Analysts’ opinions differ widely over whether this is a glorious vision or a desperate attempt to prove that there is life after death for the old postal network. The post office’s success in selling more than ¥1000bn worth of mutual funds to urban customers through a network of 1000 city branches a year after it started suggests that it is a force to be reckoned with when it comes to selling sophisticated financial products to ordinary people. On the other hand, new rules introduced by the FSA on the sale of mutual funds suggest that at least 90 minutes may be required to close a deal with any customer.
“Yucho’s business model calls for it to spread the good news about mutual funds to remote country areas, but some of the people it sells to may spend as little as ¥10,000 per deal,” suggests a bank analyst at a foreign securities firm in Tokyo. “If it’s like that, and if Yucho sticks to the FSA rules for explaining products properly, staff in remote regions won’t be earning a living from the commissions the bank can charge. They will be de facto volunteers.”
That could be right but it is just possible that Yucho’s grand vision will never be tested. For the bank’s nationwide strategy to work, it has to be accepted as a member of the Japanese Bankers Association (JBA) and, above all, must gain admission to the national system of computerised interbank transfers, which is a key part of Japan’s banking infrastructure.
Mr Yamada says that Yucho is negotiating with the JBA and tests are under way. “We hope for an agreement soon,” he adds, confidently.
A JBA spokesman declines to comment publicly but, in private, officials say they will not welcome an organisation that still has links to the government.
