Japanese banks have not – yet – suffered the fates of some of their western counterparts. On the contrary, the big ones have been busily making deals to buy chunks of western banks and securities companies (a la Nomura, MUFG, SMFG etc).
But like everything in Japan, there’s a lot going on below the surface. Friday’s news that Mizuho Financial Group, Japan’s second-largest bank, plans to raise about Y800bn ($8.35bn) by selling shares and securities to shore up its capital merely confirms an accelerating trend: Japan’s banks are in urgent need of cash. And the reason they have to rush out capital-raising plans is that they are repeatedly getting their earnings estimates wrong. We wonder why.
Just last month, Mizuho shook investors by warning it would report a full-year loss of Y580bn ($5.9bn) rather than the earlier estimated profit of Y100bn in the year to March 2009.
As Lex wryly noted, the bean counters at Mizuho were out by, um, nearly $7bn. The news, Lex added, made the number crunchers at third-ranked SMFG – which confessed shortly before that to a near-$6bn swing in full-year earnings (from a Y180bn profit to a Y390bn loss) – “look almost smart”.
Predictably, MUFG, Japan’s largest bank, not to be outdone, followed the other mega-banks early this month in revising down its forecast, predicting a loss of Y260bn for the year just ended. In late April, Nomura Securities, Japan’s largest broker, also reported a record loss of Y700bn, far greater than expected.
But apart from some serious underestimation, the revisions underscored what the FT described as “pressures on Japan’s financial institutions from the global crisis, the worsening domestic economy and falling stock prices”.
While investors could be excused for refusing to believe anything anymore that a Japanese bank says about its earnings expectations, Mizuho confirmed on Friday its recent loss-estimate warning, posting a loss of Y588.8bn (about $5.9bn) in the year ended March, citing increased credit-related costs amid the global credit turmoil and “conservative” provisioning of reserves. The bank also noted a sharp decline in share prices both at home and overseas.
So now, among the coming deluge of bank capital raisings in the Japanese market, Mizuho plans to raise up to Y600bn in common equity and Y200bn from preferred securities within a year. It also plans to redeem Y176bn of preferred securities at the end of June.
Mizuho raised Y916bn in capital in fiscal 2008, including through the sale of preferred shares, securities and debt. Including the planned raising in Friday’s announcement, it will bring the total to around Y1,716bn since April 2008.
But this time around, it will have to vye for investors to purchase its new shares with smaller rival SMFG, which this month sealed a deal to buy Citi’s Japanese brokerage business for Y545bn and said in April after reporting its Y390bn full year loss that it planned to raise as much as Y800bn in fresh equity.
Not only that but Mizuho will also be contending with growing “capital-raising fatigue” in the market, which has seen a staggering Y2,400bn already raised by Japanese banks since the end of November.
All of which is fuelling investor concerns about the overall ability of Japan’s market to absorb such large chunks of new equity. As Bloomberg notes:Japan’s three largest banks, including Mitsubishi UFJ, have already raised more than 2.4 trillion yen since the end of November as the global recession hurt their balance sheets and depleted their capital. Mitsubishi UFJ has raised more than $13 billion selling shares, preferred securities and bonds since November, following the purchase of a 21 percent stake in Morgan Stanley.
As for Mizuho’s ability to carry out such a large capital-raising after SMFG’s announcement of its plan, Shinichi Ina, a Credit Suisse analyst, summed it up in a Friday report cited by Bloomberg:“We expect Mizuho to face a considerable challenge,” Ina said … “Even if Mizuho is reasonably successful in pulling off the capital increase, it will not do much to address the relative inferiority of its capital.”
And even then, Mizuho’s fund-raising may not be enough to dispel concerns about the bank’s capital strength. As another analyst, Ismael Pili at Macquarie Group, observed: “It’s scratching the surface, because there are still potential stresses and shocks that could come with the economic maelstrom we’re facing,” according to Bloomberg.
Raising Y800bn by selling shares and securities would dilute the value of Mizuho’s stock by about 23 per cent, and would bring Mizuho’s Tier 1 capital ratio, a measure of financial strength, to about 7.8 per cent from 7.3 per cent at the end of December, he added.
The good news, for Mizuho, is that the bank expects to return to a net profit of Y200bn this fiscal year in part as it anticipates higher loan interest income. And it expects credit costs to fall to Y330bn.
The bad news is: Who in the world would believe it?
Related links:
Mizuho posts Y588bn loss but sees rebound - FT
Mizuho plans to raise Y800bn of capital – Bloomberg
Mizuho warns of $5.9bn net loss - FT
Mizuho Financial – Lex