SAN FRANCISCO - Tokyo-based UFJ Holdings Inc., which this week agreed to sell its United California Bank to BNP Paribas of Paris, may not be the last Japanese banking company to pull up stakes in the United States, observers say.
UFJ certainly is not the first Japanese banking company to call it quits over here amid dwindling profits and low capital levels at home. Several have done so since the late 1990s, and others may follow.
A flip through a listing of the commercial banks in just California, where many Japanese financial companies made investments in the 1980s or earlier to take advantage of trade and cultural ties, shows a much diminished presence. Sumitomo Bank of California is now part of Salt Lake City-based Zions Bancorp. In early November, ITLA Capital Corp. of La Jolla, Calif., said it had agreed to buy $80 million-asset Asahi Bank of California.
And in major metropolitan areas across the country, Japanese banks have closed or consolidated many of their non-deposit-gathering agencies and representative offices.
UFJ's situation in many ways exemplifies the current problems afflicting banks from Japan, where bad loans have drained profits. UFJ, which last month said it expected to record a $4.8 billion loss for the fiscal year that will end in March, said Sunday that it would sell its $10.8 billion-asset Los Angeles subsidiary to BNP Paribas, which has been increasing its investment in the western United States.
All the major Japanese banks are under pressure to raise capital and shore up profits, observers say.
"They could all use additional capital to get themselves through - but the amount varies depending on the level of problem loans on their books," said Ernest Napier, a managing director at Standard & Poor's.
After Japan's major banks issued their November financial reports for the fiscal half year, S&P put 12 of them on "credit watch." The major banks' said troubled loans had risen 16% on average in the six months, reserve coverage had fallen, and the average Tier 1 capital ratio had slipped from 6.2% to 5.7%.
The health of the remaining Japanese banks with U.S. bank subsidiaries is mixed. One that is struggling is Mizuho Holdings, which owns the $500 million asset Dai-Ichi Kangyo Bank of California, the middle-market lender IBJ Whitehall, and Fuji Bank and Trust Co. in New Jersey. Mizuho is trying to clean off $15.9 billion in bad loans by March 31 and has said it expects to post a $5.7 billion loss for its current fiscal year.
In fact, most of Japan's big banks are predicting losses for this year. But not all. The largest Japanese banking company, Mitsubishi Tokyo Financial Group Inc., the majority owner of San Francisco-based UnionBanCal Corp., has predicted a profit, of $159 million, despite a $770 million loss in the first half.
Therefore, said Fred Puorro, a managing director at the Fitch ratings agency, selling the $35 billion UnionBanCal may not be a fire-sale necessity for Mitsubishi Tokyo - "if you believe that they'll make that profit."
Still, the idea that even one of the healthiest Japanese banking companies might consider selling a prized U.S. asset is never far from the thoughts of other shareholders in U.S.-listed UnionBanCal.
Its share price surged 7% in the month before UFJ's announcement that it would sell United California Bank. Behind the rise, said Mark Agah of RBC Capital Markets, were rumors that UnionBanCal, not United California, would be sold.
"I think people heard that there was a California franchise for sale, and they were speculating that it was UnionBanCal Corp.," Mr. Agah said.
But most market watchers and executives of the subsidiary banks say the decision to sell depends more on the parent company's financial concerns than on issues of strategy or profitability at the subsidiary level.
A case in point is the sale of United California Bank, formed by the merger of two Japanese subsidiary banks earlier this year. One reason the sale surprised many observers was that an aggressive marketing campaign United California had launched suggested that it would seek to expand its market share in Southern California, perhaps even making acquisitions.
"It's clear that this is not driven by forces in the domestic market, but by concerns about performance of the Japanese parent," said Jim Hill, a managing director in Irvine, Calif., for Friedman, Billings, Ramsey who has advised Japanese bank subsidiaries.
One indication that the sale was prompted by strategic designs of its parent, he said, was that instead of marketing the bank widely, to get the best possible price, UFJ apparently shopped it to a select few potential buyers, to seal the deal as quickly and quietly as possible.
The decision to sell often comes despite the profitability, and the longer-term benefits, of the subsidiary. "Sometimes, in the overall scope of these things, these opportunities are not that important," Mr. Hill said. "It's a classic case of retrenchment, to protect your home base."
UFJ, the parent to three merging banks - Sanwa Bank Ltd., Tokai Bank Ltd., and Toyo Trust and Banking Co. Ltd. - said that the sale was part of a decision to reallocate its resources and concentrate on core businesses in retail and middle-market banking in Japan.
Similarly, UnionBanCal senior officers have often repeated that they might not be the first to know if the Mitsubishi Trust subsidiary Bank of Tokyo-Mitsubishi decided to sell its 67% stake in their company.
In November a senior officer told a group of investors in Boston, "We've kiddingly said you'll probably see it before us," because Boston's time zone is ahead of California's.
And since Japanese banking companies have been wrestling to raise profits in recessionary Japan for several years, they have already divested many of their best assets.
"While there might be some further divestitures, I don't think that will be the panacea to the companies' capital problems," Mr. Napier said.
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