Japan’s Shinsei, Aozora Jump On Merger Talks

TOKYO (Reuters) – Shares of Japan’s Shinsei Bank (8303.T) and Aozora Bank (8304.T) soared on Monday after sources said the two money-losing lenders were in merger talks to form Japan’s sixth-largest bank.

Both lenders were nationalised during Japan’s banking crisis in the 1990s and later sold to foreign funds. A new, merged bank would be on a stronger financial footing but will likely need even more government money and may still struggle to compete in domestic lending against mega-banks such as Mitsubishi UFJ Financial Group (8306.T), analysts said.

Shinsei and Aozora have been discussing a merger, two people familiar with the matter said on Saturday. The people were not authorised to speak on the record.

Shares of Shinsei jumped 14.5 percent while Aozora shares surged as much as 37 percent before finishing the day up 16 percent, as investors bet a merger could help revive two of Japan’s worst-performing bank stocks.

Shinsei has said it is likely to report a 48 billion yen net loss ($496 million) for the year to the end of March, while Aozora has estimated a 196 billion yen net loss. Both have been hit by bets on toxic assets and Japan’s weakening economy.

The banks said in separate statements that nothing had been decided. Buyout firm JC Flowers and Co, which owns 32.6 percent of Shinsei, was not available for comment. Cerberus Capital Management [CBS.UL], which owns 53.6 percent of Aozora, declined to comment.

The public listings of the two banks provided windfall profits for Cerberus and Ripplewood, the U.S. fund that initially invested in Shinsei, but since then investors have not been so lucky. Shinsei has lost 84 percent of its value since listing, while Aozora has fallen 72 percent.

“I think this is positive. Shinsei does need some capital and Aozora has never had a convincing business strategy,” said Jason Rogers, a credit analyst at Barclays Capital in Singapore.

“This will put them on a stronger financial platform from which to first stabilise and eventually grow.”

The combined bank, which would meld Shinsei’s retail banking presence with Aozora’s network in regional Japan, would have assets of 18 trillion yen ($185 billion) putting it closer in size to rivals such as Resona Holdings (8308.T) and Sumitomo Trust and Banking (8403.T).


The government, which holds Aozora preferred shares and a stake in Shinsei, would welcome the merger, Japanese media said on Saturday, adding that the merged bank may take additional public money.

More bailout money may be necessary, said Shinichi Ina, analyst at Credit Suisse in Tokyo.

“Another injection of public funds is an extremely important factor,” Ina wrote in a note to investors, citing a shortfall in deposits, Shinsei’s exposure to consumer lending and Aozora’s exposure to securitised products as negative factors.

The government pumped a total of 621 billion yen into the two banks and their predecessors and is still owed more than half of that.

Ratings agency Standard and Poor’s said the merger would have limited benefits, citing the banks’ similar businesses models and weak profitability. However, it could increase the likelihood for government support, the agency said.

The two have been criticised by Japanese media for losing billions of yen on risky investments while still owing money to the government. Since April 2007, they have lost a combined 253 billion yen, mainly on subprime investments and exposure to failed investment bank Lehman Brothers.

Both have since replaced their top management and announced plans to focus on the lower-risk business of domestic lending, although analysts said they will have a tough time cracking a market dominated by massive rivals such as Mitsubishi UFJ.


Even together, Shinsei and Aozora will unlikely be able to draw the big corporate clients, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

“Even if they want to increase domestic lending, the best they can probably do is to draw more retail customers,” he said.

“The borrowers that can’t get money from Mitsubishi and would come to them are likely to be low-quality borrowers.”

Both banks have traditionally relied on non-interest income, or profit that does not come from loans, to drive growth. That forced them to make riskier investments, Daiwa SB’s Ogawa said.

($1=97.15 Yen)

By David Dolan
(Additional reporting by Mayumi Negisihi; Editing by Rodney Joyce and Lincoln Feast)