“ “mega-mergers’ economic reasons and performances: lessons from japan”

““Mega-Mergers’ Economic Reasons and Performances:

Lessons from Japan”

Kimie Harada, Chuo UniversityTakatoshi Ito, Tokyo University

2May24, 2012 Sumy, Ukraine

Purpose Examines short- and long-term

performance of consolidations of larger scale banks in Japan.

Japan experienced its banking crisis in late 1990s, a decade prior to global financial crisis in later 2000s.

Large scale bank consolidations took place after the global financial crisis in the U.S. and Europe. Results of those consolidations taken place recently are not determined yet.


Consolidation Bank consolidations are not new. Waves of

bank consolidations in 1980s in the U.S. and European countries

Journal of Banking and Finance put together special features concerning consolidations of financial services industry in 1999.

Berger, et.al.(1999) reviews over 250 literature of financial services industry consolidation.

Amel, et.al.(2004) considers indirect effects in analyzing consolidations.


Consolidation

The government indirectly helped and arranged those consolidations.

Some criticized as aiming at “too big to fail” because consolidations in late 2000s were hastily arranged and not based on business strategy.

Public funds were injected in those newly created big banks in the U.S.


Main results Japanese banks suffered from dealing with

massive amount of nonperforming loans and urged to restore their financial health. →consolidation

Banks which had low rating of market evaluations at the announcement of a merger resulted in poor results of balance sheet analysis.

A merger of weak banks did not create sound bank even after a decade.


Brief history of crisis Hyogo bank, a regional bank listed on the

Osaka Stock Exchange, collapsed suddenly in 1995. It was the first failure of a listed bank.

There were 20 big banks and the monetary authorities proclaimed none of them would be allowed to fail.

One of the 20 big banks, Hokkaido Takushoku Bank, failed in November 1997. In the same month one of the big four securities companies, Yamaichi Securities failed.


Brief history of crisis Two large long-term credit banks failed

and nationalized under a new law in 1998.

In 1997 and 1998, the financial health of Japanese banks was questioned and they were asked to pay premiums that Japanese banks paid relative to their U.S. and U.K. competitor banks on Eurodollar and Euroyen loans.


Brief history of a crisis Nationalization of two banks started a panic

and the Japanese banking crisis became a global concern.

Capital injection by the government in March 1998 and again in March 1999 calmed the market for the moment.

Banks pursued accounting profit, such as scrambling with foreign investors, reverse merger etc. ) and utilized accounting benefits of the Deferred Tax benefits.


Brief history of a crisis Between 1998 and 2002, Japanese banks

were pressured by the market and the regulator to fatten reserves for future losses and raise the capital ratio.

Several banks attempted various measures to boost the capital ratio—some real, some cosmetic—and merger was one of the choices.

Example: It had been unthinkable that a large bank in a corporate group (keiretsu) chose to merge with another bank in an different corporate group.


Brief history of a crisis Along with mergers, some institutional

changes also took place. Banks were allowed to have securities subsidiaries and vice versa.

In 1998, financial holding companies’ structure was allowed, and it became possible to have banks and securities firms under the same roof of a financial holding company.

Focus on their mergers and examine banks’ motivations for mergers, institutional details, and consequences of their mergers.


Related literature Tachibanaki and Haneda (1999) directly

examines mergers.

Indirectly remark on mergers: Ohashi et al. (2001) Matsuura and Takezawa (2000) Drake and Hall (2003) 　　　　 Hosono, Sakai and Tsuru (2006) 　in general mergers did not improve after

mergers.


Institutional change Primary motives for mergers are cost

savings and revenue enhancements.

Group of Ten (2001) report, the most important forces encouraging mergers are improvement in information technology, financial deregulation, globalization of markets, and increased shareholder pressure for financial performance.

Literature investigated whether mergers enhanced efficiency by examining indicators of profitability and cost savings.


Institutional change In the Japanese banking sector, many bank

mergers took place when banks’ balance sheets were damaged due to increasing nonperforming loans (NPLs) after the burst of the bubble economy in 1990.

Most banks were found to be under capitalized. The number of failed banks was more than that of merged banks.

NPLs and under-capitalization might have encouraged relatively fragile banks to agree to merger proposals from relatively healthier banks.


Mizuho Financial Group Three large banks, Dai-Ichi Kangyo Bank

(DKB Asset size; 52.53 trillion yen), Fuji Bank (Asset size; 46.38), and Industrial Bank of Japan (IBJ Asset size; 42.09 trillion yen), announced a merger in August 1999.

The merger was completed in September 2001 as Mizuho Holdings.

Unusually, compared with Non-Japanese bank mergers, the three banks were amalgamated on an equal basis and the share exchange ratio was an equal 1:1:1.


Mizuho Financial GroupFigure1: Flow chart of Mizuho Financial Group

Mizuho Holdings

Subsidiaries reorganized.

Two banks plan to merge on FY 2013.New name is not determined.

May 7, 2009 Sinko Securities merged Mizuho Securities but the new company's name is Mizuho SecirotoesReverse merger.

Mizuho Securities

January 1, 2003 Financial group takes overoperations of the Holdings.

Mizuho Financial Group

Trust & Custody Services Bank

April 1, 2000 Merged

Industrial Bank of Japan

Mizuho Trust & Banking Mizuho Trust & Banking

October 1971 mergedDaiichi Bank

Fuji Bank

April 1, 2002 ConsolidatedDai-Ichi Kangyo Bank

Nihn Kngyo Bank Mizuho Bank

Dai-Ichi Kangyo Fuji Trust and Banking

Fuji Securities Mizuho Securities

IBJ Trust and BankingApril 1, 2002 Name changed

Dai-Ichi Kangyo Securities

Shin Nihon Securities.Co. Shinko Securities

Wako Securities.Co.

Kankaku Securities

Kokyo Securities

Mizuho Corporate Bank

April 1, 2001 MergedMizuho Investors Securities

New Bank

Mizuho Securities

Mizuho Investors Securities

Daito Securities.Co.

Kogyo Securities

October 1, 2000 Merged

October 1, 2000 Merged


Mitsubishi UFJ FG Mitsubishi UFJ Financial Group (MUFG) is the

most recent financial group which has two different holding companies as the roots, former Mitsubishi Tokyo Financial Group (MTFG) and UFJ Holdings.

Unlike in the case of Mizuho Financial group, MUFG has been built on many mergers.

The first merger was on April 1st 1996, announced on March 28th 1995. BTM.


Mitsubishi UFJ FG MTFG was relatively the healthiest bank

among Japanese mega banks. On the other hand, UFJ Holdings faced extreme difficulties.

Sanwa Bank (Asset size; 47.59 trillion yen) and Tokai Bank (30.36 trillion yen) merged and UFJ Holdings was established in April 2001 and these two banks merged to form UFJ Bank in January.

The merger was announced in June 2000 but it was not completed until June 2002. needed two years.


Mitsubishi UFJ FG These two big financial groups merged

and became MUFG in October 2005. The core banks of the group, Bank of Tokyo-Mitsubishi (81.11trillion yen) and UFJ Bank (68.18 trillion yen) merged the following year, January 2006.

They are now Bank of Tokyo-Mitsubishi UFJ Bank.

This large financial group plan was approved when UFJ Holdings accepted an offer to merge with MTFG in July 2004. The UFJ Holdings was the weakest among the then four major banking groups and faced an emergency situation.


Mitsubishi UFJ FG Three large

Figure 3: Flow chart of Mitsubishi UFJ Financial Group

April 2, 2001 Established/Consolidated October 1, 2005 Established/Consolidated

January 1, 2006 Consolidated

October 1, 2005 Consolidated

※Subsidiary of Tokyo Mitsubishi Bank

October 1, 2005 Consolidated

Name changed in 1996

April 1999 Merged

Mitsubishi UFJ Securities Holdings

Mitsubishi UFJ Trust and Banking

Mitsubishi Diamond Securities

Ryoko Securities

Dainana Securities

Mitsubishi UFJ Securities Co.

Mitsubishi Trust and Banking

Mistubishi UFJ Financial Group

Bank of Tokyo Mitsubishi UFJ

UFJ Tsubasa Securities

Tsubasa Securities

Sanwa Securities UFJ Capital Markets Securities

Tokai International Securities

UFJ BankTokai Bank

Sanwa Trust and Banking Tokai Trust and Banking

July 1, 2001 Merged June 1, 2002 Merged

Toyo Trust and Banking Toyo Trust and Banking Toyo Trust and Banking UFJ Trust and Banking October 1, 1999 Merged July 1, 2001 Merged January 15, 2002 Name Changed

April 2, 2002 Established/Consolidated

Hol di ngsＵＦＪ

January 15, 2002 MergedSanwa Bank


Mitsubishi Trust and BankingTokyo Bank October 1, 2001

Bank of Tokyo-Mitsubishi Bank of Tokyo-Mitsubishi

Mistubishi Tokyo Financial Group

Mitsubishi Bank

Issei Securities

Tokyo Trust Bank

September 1, 2002 ConsolidatedKokusai Securities Mitsubishi Securities Co.

Tokyo-Mitsubishi Securities

Tokyo-Mitsubishi Personal

Nippon Trust Bank


Sumitomo Mitsui FG Sumitomo Mitsui Banking Corporation

(SMBC) resulted from a merger between Sakura Bank and Sumitomo Bank, which had roots in the old Zaibatsu in April 2001.

This was a straightforward merger of two

competing banks with similar nationwide branch networks.

Sakura Bank, one of the preceding banks of SMBC, was created in 1990 when Mitsui Bank and Taiyo Kobe Bank merged. The bank operated as Taiyo Kobe Mitsui Bank until 1992 and renamed to Sakura Bank.


Sumitomo Mitsui FG The group experienced a mysterious

merger. When SMBC (Asset size; 102.83 trillion yen) established SMFG they agreed to merge with one of its wholly owned subsidiaries, Wakashio Bank in March 2003.

Under the merger, SMBC was legally dissolved, leaving Wakashio Bank as the surviving bank. However, Wakashio Bank was renamed SMBC after the merger.

This “reverse merger” was said to aim at eliminating unrealized losses of equities in assets by adding paper profits that were born by the merger.


Sumitomo Mitsui FGFigure 4: Flow chart of Sumitomo Mitsui Financial Group

TOB July, 1999

March 17, 2003 Merged

April 1, 2001 Name changedDaiwa Securities SBCM Daiwa Securities SMBC

Sakura Securities

Kobe bank

Sumitomo Bank

Yamatane SecuritiesSakura Friend Securities

Jinei Ishino Securities

October 1973 Merged Mitsui Bank April 1, 2001 MergedTaiyo Bank Sakura Bank

Taiyo Kobe Bank Sumitomo Mitsui Banking


Minato Bank

December 2, 2002 EstablishedSumitomo Mitsui Financial Group

Wakashio Bank

1996 Established

Sumitomo Mitsui Banking



Sumitomo Mitsui FG The disclosed unrealized losses of SMBC

(original SMBC) were about 672 billion yen before the merger. But, this amount of losses was completely disposed by the merger.

SMBC capitalized at 1058 billion yen which was acquired by the subsidiary with 81 billion yen. The capital of the new SMBC (former Wakashio Bank) is 560 billion yen on paper. This is why the merger is called the “reverse” merger.


Sumitomo Mitsui FG

Table 1 Capital structure of SMBC before the merger and merger carry over billion yen

SMBC (unconsolidated statement,dissolved bank)

Before merger Carry over Net assets carried over

Capital Stock 1,058 -579 479Capital Surplus 2,004 -827 1,177

Capital Reserve 1,646 -827 820Other Capital Surplus 358 - 358

Retained Earnings -437 658 222Revaluation Reserve for Land 97 - 97Unrealized gains or Losses onAvailability for Sales Securities

-672 672 -

Total Shareholder's Equity 2,050 -76 1,974

Source: Japan Center for Economic Research (2003) and Financial Statement Reports of SMBC.


Event Study Mergers among Japanese banks were

motivated under its financial crisis.

General motivations for mergers are cost reductions, synergy effects and obtaining scale merits such as economies of scale and economies of scope (G10 report).

We examine the impact of announcements concerning mergers by applying a event study methodology in order to see how abnormal returns of merged banks responded to merger-related events.


Event Study By examining abnormal returns, it is

discussed how the market judged a merger.

An example: when abnormal returns of a relatively weak bank increased and those of relatively healthy bank did not change, this would be the case of so-called a “relief merger”, healthy bank bailed out the other ailing bank plagued by NPLs.

→No concrete results.


BIS Ratios and Credit Ratings

The probability of default of mega banks became higher than their pre-merger period (Harada and Ito (2011))

BIS ratio became higher, healthier, after its financial crisis, and mergers (Table 5). Public money was injected and criteria of BIS capital was amended, so BIS ratios is less credible.

Credit ratings were downgraded (Table 6).


BIS ratios and Credit RatingsTable 5 BIS ratio (consolidated)

1997 1998 1999 2000 2001Dai-Ichi Kangyo (Mizuho since 2002) 9.08 11.46 12.11 12.11 11.58Fuji (Mizuho Corp since 2002) 9.41 11.21 11.00 11.00 10.81IBJ 10.26 11.30 12.19 11.61

Tokai 10.25 12.60 12.61 12.08Sanwa (UFJ since 2001) 9.60 11.06 12.25 12.25 10.51Tokyo-Mitsubishi (Mitsubishi Tokyo UFJ since 2005) 8.53 10.47 11.46 11.46 9.69

Sakura 9.12 12.33 12.53 11.31Sumitomo (Sumitomo Mitsui since 2001) 9.23 10.95 11.60 10.94 10.45

2002 2003 2004 2005 2006 2007 2008 2009 2010 201110.34 9.47 10.46 11.05 10.90 11.92 11.99 10.56 12.83 14.6010.82 10.42 13.02 14.64 12.81 14.01 12.17 11.89 16.00 18.80

10.69 10.05 8.36 10.4810.29 10.43 11.97 11.83 12.48 12.77 11.20 12.02 15.54 15.82

10.38 10.38 10.89 10.60 10.77 12.95 12.19 13.54 16.68 19.16


BIS ratios and Credit RatingsTable 6 Rating changes (S&P)

1991 1992 1993 1994 1995 1996 1997Dai-Ichi Kangyo (Mizuho since 2002) AA- AA- AA- A+ A+ A AFuji (Mizuho Corp since 2002) AA- A+ A+ A+ A+ A- A-IBJ AA AA AA- A+ A+ A+ A

Tokai A A A- A- A- A- A-Sanwa (UFJ since 2001) AA AA AA- AA- AA- A ATokyo-Mitsubishi (Mitsubishi Tokyo UFJ since 2005) AA AA AA AA- AA- A+ A+

Sakura A+ A+ A A A A- A-Sumitomo (Sumitomo Mitsui since 2001) AA AA AA - A+ A+ A A

1998 1999 2000 2001 2002 2003 2004BBB+ BBB BBB BBB+ BBB BBBBBB+ BBB+ BBB BBB+ BBB BBB

A- BBB+ BBB+ BBB+ BBB BBB

BBB+ BBB- BBB- BBBA- BBB+ BBB+ BBB+ BBB BBB BBBA A- A- A- BBB+ BBB+ BBB+

BBB BBB BBB BBB+A- BBB+ BBB+ BBB+ BBB BBB BBB


Financial Statement Analysis

A better measure of evaluating bank’s soundness would be financial statement data.

Indicators after 2000 are calculated here (due to the injection of public money in 1998 and 1999)

Figures 15-18 are basic data. Asset size of mega banks was similar when they were born then gap was created towards 2011.

MTUFJ bank looks sounder than others.


Figures 19-25 Figures 19 to 25 show earning indicators.

Ordinary revenue (Figure 19) and ordinary income (Figure 20) of Mitsubishi Tokyo UFJ bank is the highest. Ordinary income shows profitability from core business of banks as it is calculated by subtracting other income from ordinary income.

Ordinary revenue and ordinary income of two Mizuho banks show no sign of improvement.


Figures 26 and 27 Gross profit (Figure 26) is well known

indicator 。

It is obvious that gross profit of Mitsubishi Tokyo UFJ is stable and higher than other banks. Gross profit of Sumitomo Mitsui bank fluctuates partly due to reverse merger in 2003.

Movements in Figure 27 show gains on bond trading. There is little difference among banks.


Figures 28-30 Figures 28 to 30 show earning indicators.

Cost of Mizuho Corporate bank dropped that of other banks increased after their mergers. The hike of Mitsubishi Tokyo UFJ is partly due to merger of UFJ bank in 2006. It is surprising to know that cost of mega banks did not fall.

Ratio of salaries and allowances (Figure 29) and ratio of rental fees for land show slight downward trend but they have not drastically decreased.


Figure 31 Ratio of risk management loan sharply

dropped from its peak to around 2% in 2005 and generally has been continuing to be flat.

Recent low amount of risk management loan ratio, however, is not reliable as true nonperforming loan outstanding because the criteria have been relaxed several times (Hoshi (2011)).

It is publicly believed that credit risk of Japanese banks is more than it appears.


Conclusion Japan experienced its own financial crisis

about 10 years before the global financial crisis.

Some lessons can be learned by comparing the two crises (recent global financial crisis).

In the beginning of 1990, Japanese so-called bubble economy followed by serious financial crisis. Japanese banks started to merge after its financial crisis in order to survive.

A merger of weak banks did not create a healthier bank.


Conclusion Serious potential cost of fiscal expansion.

Public money was injected, the government support for some mergers.

Budget deficit is said to harm the health of the Japanese financial system more than the global financial crisis itself.

Credit risk of Japanese banks are increasing. It is important to reduce the cost of the future financial crises.

“ “mega-mergers’ economic reasons and performances: lessons from japan”

Documents

big banks

consolidation banks

competitor banks

merger of weak banks

large bank

larger scale banks

waves of bank consolidations

listed bank