Shinsei and Aozora Agree to Merge

 Shinsei Bank Ltd., backed by investor Christopher Flowers, and Aozora Bank Ltd. agreed to a $5.9 billion merger to form Japan’s sixth-biggest bank after losses on overseas investments.

The Tokyo-based banks named Norito Ikeda, 61, former president of Japanese regional bank Ashikaga Bank Ltd., as chief executive officer of the new company, according to a statement to the Tokyo Stock Exchange. Each bank’s shareholders will own 50 percent of the combined lender.

Shinsei and smaller Aozora, controlled by Cerberus Capital Management LP, will create a bank with about 18 trillion yen ($186 billion) of assets based on March 31 figures. They posted combined losses of $4 billion last fiscal year from soured loans and investments in the U.S. and Europe, hampering their ability to survive Japan’s worst postwar recession.

“You have two failed banks who are hoping that two minuses will make a plus, but it doesn’t usually work like that,” said Edwin Merner, who helps manage about $3 billion at Atlantis Investment Research Corp. in Tokyo. “Shinsei and Aozora don’t have a good customer base, and as far as I know, they don’t have a strategy.”

Shinsei’s market value was 323.5 billion yen as of today’s close, compared with 249.2 billion yen for Aozora. Shinsei has 2.06 billion shares outstanding and Aozora has 1.65 billion, according to data compiled by Bloomberg. The two banks are set to merge in October 2010, they said today.

Challenging Conditions

Aozora decided to combine operations with Shinsei after considering its options and taking into account “challenging market conditions,” the bank’s Chief Executive Officer Brian Prince said at a press conference in Tokyo today. He began talks with Shinsei chief Masamoto Yashiro in late January, he said.

Shares of Shinsei fell 70 percent last fiscal year, the biggest drop among 84 publicly traded Japanese banks, while Aozora slid 64 percent.

Ikeda said he will focus on rebuilding the banks’ business in Japan, leveraging Aozora’s ties to regional banks and Shinsei’s individual banking business. The combined bank may also consider requesting additional funds from the government, he said.

Japan’s government owns 24 percent of Shinsei, while Aozora owes the state 227.6 billion yen from earlier bailouts.

Their combined Tier 1 capital-adequacy ratio stands at 8 percent, the statement said. Tier 1 capital measures a bank’s ability to absorb losses.

Capital Adequacy

Aozora, whose name means “blue sky” in Japanese, had a Tier 1 capital-adequacy ratio of 12.6 percent as of March 31, more than double Shinsei’s 6 percent ratio.

“The merger should help lower funding risks facing the two banks,” said Shinichi Tamura, an analyst at Deutsche Bank AG in Tokyo. “They complement each other well financially.”

Shinsei has 30 branches and Aozora 20, according to their Web sites. That compares with 792 branches at the main banking unit of Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded lender.

Flowers first invested in Shinsei’s forerunner in 2000. Cerberus took a controlling stake in Aozora in 2003. Both lenders were created from failed long-term credit banks that were nationalized in 1998 after becoming insolvent. Flowers had “strongly requested” the merger, Shinsei’s Yashiro said today.

Loan Loss Ratios

The global credit crisis and the deepest recession since World War II have pushed up bad loans and losses at Japanese banks. The nation’s three largest lenders, which include Mitsubishi UFJ, reported a combined deficit of 1.2 trillion yen for the year ended March 31, forcing them to seek more than 4.6 trillion yen in new capital since November.

Shinsei’s bad-loan ratio climbed to 4.43 percent at the end of March from 1.69 percent a year earlier, while Aozora’s ratio rose to 4.8 percent from 0.98 percent.

Yashiro, Shinsei’s first president, returned in November to lead the bank after Thierry Porte resigned as CEO. Prince, a former Shinsei executive, took over as Aozora’s chief executive officer on Feb. 10, the same day the bank forecast a 196 billion yen loss for the year ended March 31.

Shinsei went on to post a 143.1 billion yen full-year loss while Aozora’s totaled 242.6 billion yen. Shinsei and Aozora both rose 1.3 percent before today’s announcement.