Last month’s proposal of marriage between MTFG and UFJ would create the largest bank in Japan, but it will only be positive news if the two businesses can be integrated, writes Geraldine Lambe

For the Japanese banking system, recuperation has been a long and painful process. It is only now, after more than a decade of despair, that Japan’s so-called mega-banks are ready to start performing as mega-banks should.

So, when Mitsubishi Tokyo Financial Group (MTFG) and UFJ announced last month their intention to merge, in principle at least, it sent out a strong signal that banking reform in Japan is, at last, in its final stages. Along with other changes, such as a shift away from reliance on interest income to more fee-based and commission business, as well as seeking to tap new client sectors (see Cover Story, p20), it is clear that Japan’s banks are gearing up to play a more meaningful role in Japan and maybe even on the international stage.

The merger would reduce the number of mega-banks in Japan from four to three, and would be the biggest realignment in Japanese banking since the government created the country’s four major banking groups – Mizuho Financial Group (MFG), Sumitomo Mitsui Financial Group (SMFG), MTFG and UFJ – in 1999 and 2000.

The marriage would create an entity with combined assets of about Ą190,000bn ($1729bn), usurping Mizuho Financial Group as the largest bank in Japan (with assets of about $1.3bn). It would also depose the mighty Citigroup from its throne as the world’s largest bank – by assets, if not by market capitalisation; with a market cap of $85bn (as of mid-July), the new bank would still be much smaller than Citi, at $234bn, and HSBC, at $161bn.

Most analysts see this merger (although it is more accurately described as an acquisition of a bank on the ropes by a much stronger competitor) as a positive move. UFJ has a weak balance sheet and is the only mega-bank that is still struggling to cut its non-performing loans in line with the stipulations of Japan’s regulator, the Financial Services Agency. MTFG, by contrast, has deeper pockets but is not making enough money through corporate and retail lending. UFJ’s relationships with a large number of small to medium-sized borrowers is seen as a key driver behind the deal.

It may be too soon to get excited about the synergies and savings represented by this deal, however. MTFG will inherit UFJ’s significant debts – unless it forces the bank to deal with NPLs before any formal merger takes place. And, as Japanese banks had cause to learn when the property market and equity bubbles burst, size is not everything. This deal will only yield benefits if the businesses can be integrated, if the different branch networks are made to work as one and any bloated costs are stripped out of the structure. These are significant challenges. UFJ – itself created from the merger of Sanwa Bank and Tokai Bank – has struggled to get its senior management, different divisions and infrastructure to work together.

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