Japanese megabanks to unravel cross-shareholdings as local shares soar

Japan's three megabanks are set to sell ￥850 billion of their cross-shareholdings over the next three years to free up resources for growth and investment.

The move comes after a call by the Tokyo Stock Exchange for banks to boost their price-to-book values. The Tokyo Stock Exchange, worried about some of the lowest valuations of companies listed on the bourse, in March 2023 advised companies to target price-to-book ratios of at least 1.

The ratios for the three megabanks have risen over the past year as the country's stock markets have gained. The benchmark Nikkei 225 index has gained 18% so far in 2024 as investors were attracted to Japanese shares by more liberal tax exemptions under the Nippon Individual Savings Account (NISA) program.

"Now is the good time [for banks] to sell off cross-held shares to earn profits," Hideo Oshima, a senior economist at Japan Research Institute, told S&P Global Market Intelligence on a telephone interview. The rally in the stock market could also make it easier for banks to get consent from their business partners to sell their shares, Oshima said.

Boosting price-to-book

Mitsubishi UFJ Financial Group Inc. announced plans to sell another ￥350 billion of strategic shares in other companies by March 31, 2027, after Japan's biggest lender by asset sold ￥539 billion of such shares in the three years that ended on March 31, 2023. MUFG owned ￥1.34 trillion worth of cross-held shares as of March 31, according to the lender's earnings statement for the last fiscal year.

Rival Sumitomo Mitsui Financial Group Inc., which held ￥1.01 trillion of strategic shares in March, aims to sell more than ￥200 billion of such shares by March 2025. Mizuho Financial Group Inc. plans to sell ￥300 billion worth of shares over the next three years, from the ￥916.9 billion the lender owned on March 31.

Boosting the price-to-book ratio to more than 1.0 "is significantly important for us," Mizuho CEO Masahiro Kihara said at a May 15 press conference when the lender released its earnings for the fiscal year ended March 31. Kihara said the bank intends to pass the proceeds from sales of strategic shares through potentially higher profit to investors in the form of dividends or to use them for growth investment.

The three megabanks "would want to cut back their cross-shareholdings to zero," said Toyoki Sameshima, a senior analyst at SBI Securities. "Offloading those shares would help strengthen their capital by transferring unrealized profits to retained earnings," Sameshima told Market Intelligence.

Maintaining relationships

Cross-shareholdings were often aimed at maintaining relationships with business partners. However, they were criticized by some institutional investors for holding unproductive assets and for preventing gains in capital efficiency.

Unwinding such ties could serve as another driver of shares for banks that also benefit from the normalization of Japan's monetary policy, analysts said.

Offloading strategic shares "would have an impact on share prices of banks," said Hiromi Ishihara, head of equity investment at Amundi Japan. "As an investor, we could buy shares" of such banks.

All three megabanks have outperformed the benchmark index so far this year. MUFG's shares closed at ￥1,658 on May 31, up just under 37% since the start of the year. Similarly, SMFG was up about 48%, and Mizuho was up about 32% over the same time period.

Uphill task

While the megabanks may find it easier to unravel their cross-shareholdings thanks to their size and heft, some regional banks may find the task daunting, as they often have deeper ties with local companies, frequently as customers.

For example, by March 2025, Kyoto Financial GroupInc. plans to sell just ￥16 billion of a total ￥1.0 trillion of strategic shares it held as of Sept. 30, 2023.

"We have historical relations with those companies, making it harder to unwind such ties with them immediately," said a Kyoto Financial spokesperson by phone. Strategic shares account for 96% of the regional lender's assets, and it has supported a few companies throughout their journey from startups to becoming bluechips.

One such company is Kyocera Corp., an electronic parts maker in which Kyoto Financial still owns a 4.09% equity stake as the single largest stakeholder after trust banks.