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In 2002, the Japanese banking system was facing nationalisation due to non-performing loans undermining bank balance sheets. There was no available research, no price-earnings ratios, basically no standard road map for investors with which to analyse the banking sector. However, Sovereign identified that the Japanese banking sector comprised less than 5% of Japanese market capitalisation, compared to between 25% and 30% normally.
Supporting Recapitalisation
In 2002 and 2003, with balance sheets being rebuilt to support bad debt write-offs, Sovereign made significant investments to support the recapitalisation of the Japanese banking sector. Sovereign held positions in all of the four Japanese megabanks: Mizuho, MTFG, SMFG and UFJ. UFJ was subsequently merged with MTFG to form MUFG in October 2005.
An Economy Starts to Blossom
The announcement of Sovereign's 5% stake in Japanese megabank UFJ on 29 July 2003 coincided with the turning point in the Japanese stock market and reflected Sovereign's confidence in the nascent economic recovery. Starting in 2003, the Japanese banking system staged a remarkable recovery. Non-performing loans, which peaked at 9.1% in March 2002, had been reduced to just 4% by March 2005. Public funds, which had been used to bail out the banks when they faced insolvency, were largely repaid by 2006. Finally, bank loan growth, which had been in decline for over a decade, turned positive in 2005 as Japan's deflationary period drew to an end.
Mizuho, An Industry Leader
The transformation of Mizuho perhaps best exemplifies the turnaround of the Japanese banking sector. In early 2003, the viability of Mizuho was in doubt. A deeply discounted preference share issue was sold to bank customers to maintain its capital adequacy requirements. From those dark days, Mizuho has emerged as one of the world's most valuable financial institutions with a market value exceeding USD 100 billion in 2006, over ten times its value just three years earlier.
Much credit for this turnaround must go to President and CEO Terunobu Maeda who integrated the three institutions that merged on 12 March 2003 to form Mizuho - Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan. In Japan's conservative culture, Mizuho stands out for its determination to change traditional relationship-based lending practices to a focus on return on capital and shareholder value.
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Background
Mizuho Bank was established on April 1, 2002 by the merger of Dai-Ichi Kangyo Bank with the retail operations of Fuji Bank and the Industrial Bank of Japan. All three predecessors were major financial institutions in their own right and had served as cornerstones of major zaibatsu (pre-war era) and keiretsu (post-war era).
In the merger of the three banks, Dai-Ichi Kangyo was renamed Mizuho Bank and inherited the group's individual, small business and local/regional government services, while institutional banking services were consolidated into Fuji Bank, which was renamed Mizuho Corporate Bank. The two banks were initially consolidated under a holding company, Mizuho Holdings. On October 1, 2005, they were transferred to a new holding vehicle, Mizuho Financial Group.
Mizuho Bank has 515 branches and over 11,000 ATMs, and is the only bank to have branches in every prefecture in Japan. It serves over 26 million Japanese households and 90,000 SME customers. The name “Mizuho” is an archaic Japanese term meaning “golden ears of rice,” and was used in the classical text Nihon Shoki to describe Japan.
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