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Capital Reserve Rules May Help Japan's Banks : Proposal May Force Pursuit of Higher Profits

June 22, 1988|From Reuters

TOKYO — New rules aimed at boosting the capital reserves of the world's biggest banks, which appear to leave Japanese banks at a disadvantage, may in fact help them become even more formidable competitors, Tokyo analysts say.

The rules proposed by the Bank for International Settlements--known as the central bankers' central bank--would require banks around the world to set aside funds representing 8% of their assets as a safety cushion.

The rule would make greater demands of Japan's huge banks--six of the world's top 10--which have proportionately less money set aside and have been less aggressive about pursuing profits than banks in other countries.

"BIS is forcing banks to improve their profitability, and that's good for banks," said financial analyst Robert Zielinski with Jardine Fleming (Securities) Ltd. "They will be much more competitive institutions."

Stunning Comeback

Industry experts believe that Japan's banks may be able to achieve the same kind of success-in-adversity as the nation's exporters, who were threatened with ruin three years ago when the yen started its steep rise against foreign currencies.

The export-oriented firms have staged a stunning comeback, turning in strong profits for the 1987-88 business year, and analysts are betting the banks can do the same.

"The banks will end up bigger and stronger than ever before," said Brian Waterhouse, financial analyst with brokerage James Capel Pacific Ltd. "(The rules are) making them focus more on return-on-assets rather than market share, and that will make them more competitive."

But for now, investors are worried about the possible negative impact of a flood of new share and convertible-bond offerings as the banks go to the equities market to raise the capital needed to meet the proposed BIS standards.

Under the rules proposed last December, international banks from 12 countries must meet the capital requirements by 1992.

Analysts said major Japanese banks will have to raise about 8,000 billion yen ($64 billion) or 400 billion yen ($3.2 billion) per bank over the next five years.

Analysts said they expect financings worth about 1,000 billion yen ($8 billion) to be launched between July and September, and analysts are worried investors may not be all that eager to absorb the new shares.

May Have Trouble

"Bank (stocks) have been significant underperformers over the last year," said Andrew Ballingal, senior manager of the equities department at Barclays de Zoete Wedd Securities (Japan) Ltd.

Rumors of rising interest rates also have dampened investor enthusiasm for bank shares, whoses prices might fall if higher rates ate into the banks' profits.

Analysts caution that the banks may have trouble persuading longtime corporate shareholders to accept a share of the new financings equal to their current holdings despite their traditional willingness to do so.

"Corporate shareholders took shares before because they needed to borrow funds. Now they are getting funds in capital markets, and they don't want any more shares," said an analyst at a major Japanese brokerage house. "So brokers are trying to get individuals to buy."

The market for bank shares is partly underpinned by the belief that the banks, stockbrokers and Finance Ministry will do all they can to help the offerings succeed.

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