Issued: September 11 ,2000
Nippon Credit rises from the ashes
Failed lender relaunched as private sector bank; shareholders seek new collateral business, online banking
MAKOTO SATO
Staff writer
Nippon Credit Bank's board members announce the beginning of operations at a news conference on Sept. 4.
On Sept. 4, Nippon Credit Bank, which in January 2001 is scheduled to adopt the name Aozora Bank - meaning "blue sky" in Japanese - started operations as a private sector bank. The new bank plans to expand loan provisions to venture companies in an attempt to distinguish itself from the image of Nippon Credit before its nationalization in December 1998, adopt new technologies such as Internet banking and broaden its collateral base.
Analysts remain skeptical over the future of the reborn Nippon Credit Bank because of problems such as deteriorating assets and brain drain. Moreover, there is currently almost no synergy between business at the Softbank Group, the new bank's main shareholder, and Nippon Credit, according to analysts.
"Our mission is to provide loans to small and midsize companies, including venture companies using assets other than real estate as collateral," newly appointed president of Nippon Credit, Tadayo Honma, told the media on Sept. 4. He also mentioned the possibility of taking sales credit or intellectual property rights as collateral. "We consider the future prospects of businesses run by loan recipients to be of utmost importance," Honma added. While stressing the new business strategies to be undertaken by Nippon Credit, Honma also made it clear that the bank would remain focused on traditional collateral-based loans, including existing loans outstanding.
Nippon Credit currently has credit of 3.24 trillion yen ($30.5 billion), which is down from its March 1998 total of 7.78 trillion yen. The bank said that out of the 3.24 trillion yen, 1.09 trillion yen is made up of nonperforming loans. Honma said Nippon Credit should base its earnings on its loan book until it gets its venture business up and running.
Nippon Credit recently requested 260 billion yen in public funds from the Financial Reconstruction Commission, in addition to the 3.2 trillion yen it has already received from the government. According to Honma, the additional money is necessary to improve the bank's balance sheet. Nippon Credit expects to post 13.6 billion yen in core-business profit at the end of March 2001, and 45.3 billion yen at the end of March 2004. The bank also expects to have 3.8 trillion yen in loans outstanding by the end of March 2004.
Analysts, however, doubt whether Nippon Credit will be able to post a profit so soon. Yushiro Ikuyo, bank analyst at Commerz Securities (Japan) Co., said the balance-sheet deterioration of Nippon Credit is worse than that of Shinsei Bank's, formerly the Long-Term Credit Bank of Japan, which also nationalized before its reprivatization. "Nippon Credit used to be a bank that specialized in real-estate loans, and loans to real-estate companies still make up 25% of aggregate loans outstanding. I estimate that most of the loans to these companies are nonperforming," Ikuyo said. Therefore, if land prices were to decline annually by 7% to 8%, the total size of bad loans at Nippon Credit could easily expand.
Kazuhito Ikeo, professor of economics at Keio University, who was appointed as a part-time board member of Nippon Credit, told the Nikkei Financial Daily that rehabilitating the bank will be extremely difficult. "Since Nippon Credit is a huge bank, merely changing board members will not result in operational changes. Japan's overbanking situation has not yet been cleared up," he said. "Still, we should seek to establish a completely new and different business model for banking than other banks. Otherwise, there is no reason to keep Nippon Credit alive."
Ikuyo of Commerz Securities thinks that it may be possible for Nippon Credit to improve its business model, but it will be quite a challenge for it to change the structure of its balance sheet. "A bank's balance sheet is a history of the bank itself. It is not easy for a bank to change the companies it provides loans to from A to B. In this sense, the bank's assets themselves determine the short-term strategy of the bank. I assume Nippon Credit's board of directors does not want to put so much emphasis on the bank's existing loan business, but they have no other option since many companies still rely on Nippon Credit loans," Ikuyo said.
Taku Kumazawa, an Internet analyst at Wit Capital Japan Inc., said the bank's stock also influences its earnings. "Adding profitable loans over a period of one or two years would not drastically change the bank's earnings. In fact, considering the current assets of Nippon Credit, improving earnings in three years will be hard to accomplish," he said.
Kumazawa also said that Nippon Credit has virtually no experience in providing loans to venture companies. "I have interviewed a few former Nippon Credit personnel. They said Nippon Credit had been concentrating on project finance before the collapse and had no experience in providing loans to venture businesses," he said.
Another cause of concern is the quality of the bank's employees. Nippon Credit had 2,290 employees at the end of March 1998, but currently has only 1,690. Reducing the number of employees was part of its rehabilitation program, but the first workers to go were the most able and skilled ones, who left the failing company on their own accord. "Whether Nippon Credit can pool together the necessary personnel using the Softbank and (Softbank President Masayoshi) Son names will determine the future of Nippon Credit," said Akira Ishihara, senior analyst of Shinko Securities Co.
Ishihara said he does not understand how Son will link Nippon Credit with his existing businesses. "There is almost no synergy between Softbank's financial business conducted through Softbank Finance Corp., an intermediate holding company, and Nippon Credit," he said. "But since Nippon Credit has only 16 branches nationwide, Son may implement Internet technology to lower operating costs. Providing loans to venture companies, which the Softbank group had thus far not been able to do, is the only way to connect Nippon Credit and Softbank." |
