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Combining Operations to Gain Efficiency

November 9, 1999

A process of creating "megabanks" has begun in Japan. In August Dai-Ichi Kangyo Bank, Fuji Bank, and the Industrial Bank of Japan announced an overall plan for consolidating their operations, and in October Sumitomo Bank and Sakura Bank announced a merger plan. In terms of total assets, the consolidation of the first trio will make them the largest banking group in the world, while the merger of Sumitomo and Sakura Banks will put them in second place, slightly above Germany's Deutsche Bank, currently the world's leader.

Motives Behind Consolidation
Dai-Ichi Kangyo and Fuji, known as "city banks" in Japan, and the Industrial Bank of Japan, a leader in industrial finance, will establish a joint financial holding company in the autumn of 2000, looking to consolidate fully by around the spring of 2002. The total assets of the new financial group will be a massive 140 trillion yen (1.27 trillion U.S. dollars at 110 yen to the dollar) outweighing the 97 trillion yen (881 billion dollars) of Germany's Deutsche Bank. This integration is a bid to survive Japan's own financial Big Bang as well as to deal with increasingly stiff global competition, with the three banks seeking to become a core player in Japan as well as one of the top five players in the global financial market. The coalition is also expected to accelerate a major Japanese financial realignment.

Integration of the three banks' businesses will proceed in two stages. First, a joint holding company will be established in the autumn of 2000, with all operations placed under its umbrella. At the same time, their businesses will be divided by type of client--individual and corporate, for example--and by function, such as approval and asset management. Integrated management cutting across all areas will be under the overall control of the holding company.

Around the spring of 2002, the three banks will unite under the holding company, whereupon business will be spun off into smaller units according to client and function types. Ultimately, operations will be merged and reorganized into a number of distinct units, such as a consumer bank for individuals and small companies, a corporate bank for big companies, an investment bank, and a wholesale securities firm, with the holding company handling overall management.

The Wedding of Sumitomo and Sakura
Whereas the three above-mentioned banks have opted to consolidate to strengthen their international competitiveness, Sumitomo Bank and Sakura Bank (born of a 1990 merger of Mitsui and Taiyo Kobe Banks) chose to merge prior to the time when struggles for leadership may lead to time-consuming total fusion of banking operations. More than that, the wedding of Sumitomo and Mitsui will bring back together two of the main financial institutions in a prewar zaibatsu conglomerate. The decision to merge despite the various difficulties it will create may be evidence that they have acknowledged the difficulties financial institutions will soon have in a survival race.

In their October announcement, Sumitomo and Sakura Banks said they would get together in 2002. The combined assets of the new bank will amount to 98 trillion yen (891 billion dollars), making it the world's second largest. Each of the partners has its own turf: Sumitomo has branches mainly extending from the Osaka region to the west, while Sakura has branches covering eastern Japan, from Tokyo to the northeast. Thus the merger should give them extra power.

Restructuring as the Key
The alliance of the first three banks will be the first to make maximum use of a holding company since laws lifting the ban on such companies went into force in March 1998. This method was chosen as the most effective means of consolidating and restructuring operations.

Unlike the conventional "equal-basis" merger formula, the creation of a holding company means that the current operations of the three banks can initially simply be transferred over to the holding company's umbrella as they stand. This eliminates the need to set pay scales in line with the highest-paying bank, or to harmonize systems, allowing a cap to be kept on the increase in new expenses that is usually the downside of a merger. It also provides more opportunity to address problems before operations are restructured. At the same time, it also offers the benefits of a merger in that all operations are integrated under holding-company management.

While the three banks emphasize that this business tie-up will be a mammoth project without historical parallel, the challenge in the days ahead will not only be the expansion of scale but also streamlining and boosting the efficiency of their organizational and business set-ups, and improving profitability. In the five years following establishment of the holding company, the group will move forward with restructuring, consolidating 150 branches, shedding 6,000 staff members, and cutting costs by 100 billion yen (909 million dollars), while also spending 150 billion yen (1.36 billion dollars) per year on information technology investment in order to strengthen their business functions. Their goal is to achieve stable net operating profits of over 1 trillion yen (9.09 billion dollars). The success or failure of the tripartite consolidation will hang on this restructuring.

As for the Sumitomo and Sakura merger, there is a five-year plan for eliminating some 9,000 personnel and integrating or closing down from 100 to 200 redundant branch banks. The financial world is keeping a close watch on these upcoming developments, eager to see whether they work out smoothly or not.

Trends in JapanEdited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.