1 + 1 = 1

The Shinsei-Aozora marriage has just been announced. Official announcement to be made some time in May (this month!) and the happy day is some time next summer (holding company structure). One wonders about the shotgun nature of this union (but if it is a shotgun, there's really no doubt who's holding it).

Immediate gut reaction: Is this creation of Japan's sixth-largest bank a signal for foreign capital to start playing fast and loose with Japanese financial institutions and its economy? Citi's discarding of Nikko Cordial, and AIG's abandoning of its prestigious Marunouchi HQ hardly look like acts of faith in the world's second largest economy's ability to turn around the failed fortunes of these one-time giants. If the regulators here feel that Japan is just another "Kleenex ecomony", to be used and discarded in the same way that Thailand and Russia have been in the past, it will become much more difficult for foreign capital to do business here. Of course, if the FSA really has been holding the gun to the two banks' heads, then any fallout from the potential merger can be laid at the FSA's door.

And there could be fallout - does the new bank really need the consumer finance side of Shinsei? Buying the Japanese GE consumer finance arms was an act of faith on Shinsei's part (and maybe a signal of loss of faith on GE's part?). Even given that consumer confidence will bounce back in a few years, is it really a good idea to hang onto consumer finance operations now that the interest caps are in force, especially at a time when consumer spending is low? The reputational risk alone of consumer finance could be enough to drag down a new bank's name (Takefuji and Aiful both spring to mind as examples of brands you would not now touch with a bargepole).

The Shinsei retail banking operation is a reasonably strong brand, and I would put money on the Shinsei name being retained there, but other operations, including the real estate businesses, are going to take quite a lot of work before they can be fully integrated.

And then there are some practical difficulties. Shinsei has announced a move from the old LTCB headquarters in Uchisaiwaicho. What's going to happen there? The computer systems will need a lot of work (and diplomacy) to integrate, if a Mizuho-style foul-up is to be avoided... Not to mention the jockeying for control at the top levels.

Hardly a fairytale romance, but hopefully a happy ending for all in the end.

Other posts by Hugh Ashton:


Wow, some content on the Japan Inc web page ! I'll have to come back.

Hello, Hugh :-) Of course Aozora is a Lehman victim, isn't it ? Nice for the two credit banks LTCB & NCB to end up together - and Cerberus has been in Aozora anyway since 2003, right ?

Mmm, Japanese banking. It's all good until the music stops, eh ?

Shinsei also dropped a packet on the Lehman's debacle. It may well not be a coincidence that the two foreign-owned and managed banks were the ones playing heavily in the risk markets that the Japanese institutions didn't touch to the same extent.

Of course, there are exceptions. For example, Norinchkin (the central agricultural bank) got burned quite badly (USD6 bn loss) by reason of its CDS and subprime "investments". It's had to borrow from its member institutions (JA) to the tune of nearly JPY2 tln (USD 20 bn) in order to raise its equity capital, implying that this large secret pool of money was engaged in some very risky business indeed (this has been expected for some time, as it happens).