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3 Major Mega Banks
Racing To Repay Borrowed Public Funds

3, 23. 2006

   A race is heating up among the three major Japanese megabanks toward the repayment of the public funds that the government has injected into them to pull them out of difficulty over nonperforming loans. The reason behind this is that each of the banks is now trying to appeal to the public that its management is qualitatively good and sound by complete the repayment of the public funds ahead of its rivals as quickly as possible.

Headquarters of Mizuho Financial Group, Inc.
Headquarters of Mizuho Financial Group, Inc.

   Of the trio, the Mizuho Financial Group, Inc. (Mizuho FG) and the Mitsubishi UFJ Financial Group, Inc. (MUFG) declared that they would complete the repayments within the course of the first half (April-September) of fiscal 2006, while the other one, the Sumitomo Mitsui Financial Group (SMFG) declared to move up the target of full repayments to fiscal 2006 from the originally set fiscal 2007.
   "The Megabank That Relies on the Least Amount of Public Funds as of the End of Fiscal 05 (March 06)" is the sort of a catchphrase Mizuho FG may have planned to use to attract investors. But the plan must have gone out of the window as MUFG announced that it would repay public funds amounting to 316,500 million yen within the course of March. This repayment would be made possible by having five companies, including The Norinchukin Bank and Nippon Life Insurance Co., take over the repayment of the public funds.
   The public funds were injected into the megabanks mostly by investing in them in the form of purchasing their preferred stocks with the funds. The banks would thus repay the public funds by buying back the stocks by using the balance in hands and other available money within the limits stipulated in their certificates of incorporation

Mizuho Should Have Been a Step Ahead

   MUFG, which repaid the public money by buying back the preferred shares worth 323,600 million yen in October last year and again 255,900 million yen in December for a total of 599,500 million yen, had already used all the funds it could for the re-purchase as provided for under its certificate of incorporation. Mizuho FG should have been able then to be a step ahead of the MUFG in the race for finishing the repayment of the public funds. MUFG, however, made what some people in the financial industry called "prohibited move" of having the life insurance and other intimate firms to repay the funds in order to beat Mizuho FG. As a result, the outstanding amount of the public funds still owed by MUFG, which had stood at 820,500 million as of the end of February, dwindled to 504,000 million yen at the end of March, compared with 600,000 million yen of Mizuho FG.
   MUFG plans to issue preferred subscription certificates in the course of March to offset the decrease in equity capital caused by the forced advance repayments of the public funds. An MUFG executive says that MUFG, as the only Japanese financial institution listed in the New York Stock Exchange, must avoid being beaten by Mizuho FG no matter by what means."

Facing a Crucial Challenge at the Outset of New Fiscal Year

   As far as the "quality" of capital is concerned, however, Mizuho FG had kept an advantageous position as of the end of March (end of fiscal 2005), because all the preferred stocks left for Mizuho FG were of the "debenture type."
   There are two types of preferred stocks. The one is the "convertible preferred stocks" that may be converted if so desired by the holder under certain conditions. The other one is the "repayment-type (debenture-type) preferred stocks" that are repaid in cash in the same way as the debentures are redeemed in cash.
   Since the outstanding public funds still remained for Mizuho FG at the end of March were in the form of the debenture type, unlike those held by MUFG which were of the convertible type, the dependence of Mizuho FG's basic equity capital (Tier1) on the public funds by the percentage was nil and ahead of MUFG. In the case of MUFG, the corresponding percentage was still over 8%, even though it repaid 316,500 million yen.
   MUFG is set to repay all the public funds injected to it by buying back the preferred shares as soon as the amount of the acquisition of its own shares for fiscal 2006 is approved at its shareholders general meeting to be held in the end of June. By the full repayment, MUFG hopes to beat Mizuho FG in name and deeds. However, all the employees concerned with financial affairs at Mizuho FG are also doing their best to work out necessary countermeasures. Involving also SMFG, which declared advance repayments of the public funds, the race for completing the repayments is likely to go through the major climax as soon as the new fiscal year begins.

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