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One Investor Has $1 Billion to Plow Into Shaky Japan Banks

Taiga Uranaka and Takako Taniguchi
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One Investor Has $1 Billion to Plow Into Shaky Japan Banks

(Bloomberg) -- Yoshitaka Kitao wants to build a financial empire in an area shunned by investors: the downtrodden ranks of Japan’s regional banks.

The chief executive officer of SBI Holdings Inc. says he has close to $1 billion to plow into any of the 104 local lenders scattered across Japan, which were described recently by one analyst as an “accident waiting to happen.” More than 10 banks have approached the financial conglomerate for investment, Kitao said in an interview, without naming them.

Kitao is betting that his firm, which has shaken up Japan’s securities industry by becoming the biggest online brokerage, can help to modernize banks that still rely on costly physical branches to serve ailing rural communities. SBI took its first step last month when it agreed to take a one-third stake in Shimane Bank Ltd., a struggling lender in western Japan.

“These banks are coming to us with the hope that they can find a way out of their plight by teaming up,” he said. “The key thing is how to change them by utilizing the Internet and fintech as a weapon.”

Profitability of Japan’s regional banks is waning as plunging interest rates dent income from loans and bond investments. To counter that, they are investing in securities abroad and lending to riskier borrowers, making them vulnerable to losses if the economy and financial markets sour.

“The negative interest-rate environment and delayed restructuring by regional banks are likely to keep industrywide profitability low,” S&P Global Ratings analysts wrote in a report published Monday.

Read about the challenges facing Japan’s regional banks

Kitao, 68, said his group can help bring down banks’ costs by sharing information-technology systems and anti-money laundering processes, and harmonizing their automated teller machine networks. By improving their online services, lenders could make it easier for customers to use their accounts and obtain loans from banks in their hometown even after they move elsewhere, he said.

The former Nomura Holdings Inc. banker said that SBI is “doing due diligence one by one” on the banks that have approached it. The firm is also looking for investors in a planned holding company that will take stakes. Various firms have shown interest, including the nation’s megabanks, larger regional lenders and overseas entities, he said.

Japanese banks are the worst-performing industry group on the Topix stock index over the past four years, and now trade at just 0.32 times book value on average. Regional lenders have an average return on equity of only 3%, less than half that of the benchmark gauge, data compiled by Bloomberg show.

The Topix Banks Index closed 0.5% higher on Tuesday in Tokyo.

Kitao is confident that the beaten-down shares of regional lenders offer the chance for capital gains, especially if SBI can help them revamp their business strategies. The size of stakes to be taken will vary on each deal, depending on how much the banks ask for, and his firm hasn’t set a limit.

SBI could invest on a scale of 100 billion yen ($940 million) if a particularly good deal comes along, Kitao said. Investments of 10 to 20 billion yen are “not big money,” he added.

SBI can also help regional banks manage their securities portfolios, according to Kitao -- a task that is becoming more complicated given that lenders are taking more risks now that most Japanese government bonds are yielding less than zero. When Shimane Bank announced SBI’s capital injection last month, it said it will book losses to clean up its securities portfolio and close branches.

Kitao, known as a straight talker who built SBI into a group that does everything from Internet banking to insurance and even biotechnology, is mindful that not all local lenders would welcome support from his company. Many are fiercely independent and already brushing off calls from government officials to consolidate.

“They have long been feudal lords in their communities, so I can understand there is resistance,” Kitao said. “They can’t find a way out of their difficulties by merging with another bank.”

SBI has been trying to win trust by cultivating business alliances, he said, emphasizing that the firm will only invest in regional banks at their request.

Kitao founded SBI 20 years ago as SoftBank Investment Corp., after SoftBank billionaire Masayoshi Son invited him to join his empire. While SBI has long since ended its capital relationship with SoftBank, Kitao has said he remains a confidant of Son.

Both men have been investing in global tech companies. Now Kitao’s sights are also set on more traditional targets at home.

“It’s for a good cause: the revitalization of local economies,” he said. Still, he added, “we won’t invest just because they’re cheap. It’s also important to try to turn them around with our resources.”

(Updates with comment from S&P in sixth paragraph)

To contact the reporters on this story: Taiga Uranaka in Tokyo at turanaka@bloomberg.net;Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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