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Japan megabanks have slowed sale of stock in corporate borrowers amid pandemic

The pandemic has significantly slowed the Japanese megabanks' years-long effort to reduce their equity holdings in listed companies to which they lend.

In the fiscal first quarter ended June 30, Sumitomo Mitsui Financial Group, Inc., Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. sold a combined ¥25.2 billion worth of their corporate customers' stock, according to company statements. It was about 5% of what they unloaded in the previous fiscal full-year ended March 31.

"We're slow [in] selling the shares because we can't meet [the customers]," an official at Sumitomo told S&P Global Market Intelligence, citing pandemic restrictions. "This is the kind of subject we need to discuss in meetings."

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In Japan, it has been common practice for banks to own stock in the companies to which they lend through so-called "cross-shareholdings." The intention is to foster business relationships between lenders and borrowers. Such cross-shareholdings are also seen as protecting borrower companies from hostile takeovers because the banks are considered long-term shareholders unlikely to sell their shares.

However, the government for years has been encouraging lenders to reduce such exposures because banks are required to book impairment charges for their equity portfolio during market downturns and that increased volatility to their earnings in the past. Banks also need to deduct any unrealized valuation losses on securities held under cross-shareholdings from their Tier 1 capital, which is an added pressure on their capital buffer. In 2018, the Tokyo Stock Exchange started requiring the disclosure of details of cross-shareholdings in order to accelerate the unwinding of these positions.

"It's clear for the banks that [holding] equities hurt [their] capital ratios," Michael Makdad, a senior analyst at Morningstar, told S&P Global Market Intelligence.

Less room to buy back

Banks tend to sell cross-held shares gradually and over a longer time horizon, usually after reaching a consensus with the target companies, in order not to dampen their share prices. But now, as many customers are keen on raising funds to keep their businesses running amid the coronavirus crisis, companies are left with less room to buy back shares from the lenders, bank officials said.

"I think [the banks] eventually will sell down almost everything, even if it takes another decade to complete," Makdad added. "There is seasonal difference and timing issues from quarter to quarter. This year I imagine it would have been even more difficult to sell than usual."

As of June-end, the outstanding amount of shares under cross-shareholdings at MUFG totaled ¥1.989 trillion. It was followed by ¥1.288 trillion at Sumitomo and ¥1.269 trillion at Mizuho.

Sumitomo aims to sell a total of ¥300 billion worth of shares over the next five fiscal years ending March 2025, or an average of ¥60 billion per year. During its fiscal first quarter through June, the bank only sold ¥12 billion of cross-held shares, compared with ¥119 billion of the equity it reduced in the previous fiscal year. It unloaded an average of ¥119.8 billion worth of shares per year over the past four fiscal years.

MUFG reduced ¥11 billion of shares in the April-June period. The lender sold a total of ¥733 billion worth of shares over the past five fiscal years, or an average of ¥147 billion per year. In the previous fiscal year, it unloaded ¥139 billion worth of shares.

Mizuho cut ¥2.2 billion of its equity holdings for the three months to June. It plans to unload ¥300 billion worth of cross-held shares between March 2019 and March 2022, or ¥100 billion a year. In the last fiscal year, the bank sold ¥147.8 billion worth of shares.

As of Aug. 14, US$1 was equivalent to ¥106.48.