Japan's Banking Minnows Swim in Risky Waters

(Bloomberg Opinion) -- Pandemics shouldn't make small banks adventurous. Tell that to Japan's lenders.

Shinsei Bank Ltd. is making its biggest overseas acquisition, buying a consumer-finance unit from Australia & New Zealand Banking Group Ltd. for the equivalent of about $480 million, according to a statement Tuesday from the Tokyo-based lender. Aozora Bank Ltd., also based in Tokyo, said in January it would purchase a 15% stake in Vietnam's Orient Commercial Joint Stock Bank Ltd. for an undisclosed sum, its first foreign foray in more than a decade.

Like the rest of Japan's banking sector, the lenders are struggling with low interest rates and aging demographics that have depressed returns in their home market. It's questionable whether seeking better growth opportunities overseas offers a path out of their troubles, though, especially when coronavirus lockdowns have devastated economies across the globe. Focusing on their domestic challenges may be a more sensible path.

For Shinsei, there's the added concern that it may be overpaying. The price Shinsei has agreed for UDC Finance Ltd., New Zealand's largest non-bank lender, is more than the $461 million that HNA Group offered in 2017, before the country's regulators rejected the bid because of the Chinese conglomerate's opaque ownership structure. Before its debt-fueled buying spree attracted the ire of Beijing, HNA had acquired a reputation for paying over the odds.

The UDC price equates to 1.2 times net tangible assets. Anything above 1 gives rise to goodwill, exposing Shinsei to the risk of writedowns if anything goes wrong. That's a prospect that the lender, which itself trades at about 0.32 times forward book, can ill afford. Bad loan costs are set to surge for Japanese banks, and Shinsei estimates the acquisition will pare its capital adequacy ratio by 0.4 percentage point. At 10.8% post-deal, the ratio will be well below that of Japan's biggest banks, according to Bloomberg Intelligence analyst Shin Tamura.

Mitsubishi UFJ Financial Group Inc. booked a $1.9 billion one-time charge for the quarter ended Dec. 31 because of a drop in the share price of an Indonesian subsidiary. The megabank is far bigger than Shinsei and a savvier international investor.

The ANZ unit purchase threatens to distract Shinsei from its strong consumer leasing franchise in Japan, where it's one of the four big players alongside MUFG's Acom, Sumitomo Mitsui Financial Group Inc.'s Promise, and Aiful Corp.

Aozora's strategy is open to similar objections. The bank plans to help Vietnam's Orient Commercial with risk management and compliance systems based on international standards, and they will work together on digital banking and investment banking services, the Nikkei Asian Review reported in January. While the report valued the deal at only about $139 million, the investment will suck attention from its main business. Aozora has significant exposure to U.S. nonrecourse real estate lending, according to Michael Makdad, an analyst at Morningstar Inc. in Tokyo.

Both Japanese banks have been reconstituted by overseas investors after earlier failures. Shinsei, formerly known as Long-term Credit Bank of Japan Ltd., was the first to be taken over by foreign private-equity firms when a consortium including Ripplewood Holdings LLC and J.C. Flowers & Co. bought the lender in 2000. Aozora was known as Nippon Credit Bank Ltd. before being taken over by Cerberus Partners LP.

If the pair must do deals, perhaps they should consider reviving their merger that collapsed in 2010. At least that would keep their focus where it belongs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.