More Japanese Bank commentary:
Poor loan reserves dog Japan's banks
By Gillian Tett and Naoko Nakamae
Published: June 14 2000 21:21GMT | Last Updated: June 14 2000 21:27GMT
When negotiations took place earlier this year between the Softbank consortium and the Japanese government over the sale of Nippon Credit Bank, one point almost torpedoed their talks: bad loan reserves.
For though the Japanese government offered reserves to protect against future losses on NCB loans, Softbank insisted they were too small to cover the risk.
The two sides eventually reached a compromise. But it has now become clear why Softbank was so nervous.
Last week Shinsei, the other Japanese nationalised bank that was sold to foreign investors last year, admitted that some Y450bn ($4.21bn) of the bank's Y9,000bn portfolio had turned sour since the sale last year.
This was in spite of Shinsei (formerly known as LTCB) having been "cleaned up" by the government before its sale to Ripplewood, a US private equity firm - meaning that about Y4,000bn of bad loans had already been removed from Shinsei's books.
Masamoto Yashiro, the president of Shinsei, insists that these large figures were not a complete surprise. "We knew what we were getting into," he says.
But Shinsei's reserves, of Y880bn, are only twice the size of the sour loans facing the bank. Consequently the big question hanging over the banking sector - and the sale of NCB - is just how effectively Shinsei can resolve the issue.
The matter is particularly complex because the deal struck between the Financial Reconstruction Commission, the body overseeing banking reform, and Ripplewood was also a compromise. Initially the US team wanted to conduct its own due diligence of Shinsei before the sale, and create a loss-sharing scheme.
But the FRC insisted on doing its own due diligence and said that a loan-sharing scheme was banned under Japanese law. Instead, the FRC created a scheme whereby Shinsei could force the government to "take back" any loans that lost more than 20 per cent in value over three years.
The FRC also boosted Shinsei's reserves, but stipulated that Shinsei hand back some of this money if it returned bad loans to the government.
This scheme offers Shinsei fairly good protection. But it includes a detail with crucial implications for the corporate world: if Shinsei "forgives" a loan to a weak company, it cannot offload the loan on to the government if that company later fails. Consequently there is no motive for Shinsei to forgive loans unless it is sure the company will survive.
"If we decide to forgive a [portion of a] loan, we lose the ability [to exercise this option]. And if the company doesn't regain its health, we will lose everything," says Mr Yashiro.
This detail would not have mattered if Japan's economy had rebounded, given that many of LTCB's loans are to companies that are "borderline" credit risks. But the economy contracted again in the second half of last year.
And, most important, the introduction of stricter accounting standards this year has exposed a new batch of losses, which companies had hidden in their extensive network of subsidiaries. As these losses have surfaced, auditors have been unable to approve accounts at companies that are in the red on a consolidated basis.
"The amount of negative net worth has been much larger than we thought," says Mr Yashiro.
This has left several companies asking for help - including, most visibly, Sogo which is appealing to its creditors to forgive an unprecedented Y639bn of loans. And though Shinsei has not publicly decided how to react to the Sogo case, the bank's stricter attitude has been reflected in last month's failure of two listed companies on the first section of the Tokyo Stock Exchange.
Life, the consumer credit group, collapsed with Y966bn of debt in Japan's fourth largest bankruptcy since the second world war, while Dai-Ichi Hotel collapsed with Y115bn of debt. Shinsei was the main lender to both.
"[These failures] illustrated the determined attitude of Shinsei Bank towards large borrowers, leaving widening anxiety among companies requesting waiver of credits and their business partners," says Teikoku Databank.
Mr Yashiro, for his part, insists that this sudden flood of failures will not continue. He also believes that Shinsei's problem with bad loans is far worse than at most other banks.
But the rest of the banking sector is far less transparent than Shinsei, and most banking analysts do not share Mr Yashiro's optimism about the other banks. Indeed, NCB's loan portfolio is considered worse than Shinsei's.
The FRC may not have finished all its arguments with Softbank yet.
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