Mitsubishi UFJ Financial Group (MUFG) will raise ¥990 billion ($10.6 billion) from the sale of common and preferred shares to replenish its capital base following its $9 billion investment into Morgan Stanley.
MUFG, which is Japan’s largest bank in terms of assets, has little exposure to the toxic subprime-linked securities that has left its US and European peers billions of dollars in the red this year. But, like other Japanese banks, it has extensive shareholdings that are rapidly losing in value as the stockmarket continues to plunge. Yesterday, the Nikkei 225 index dropped 6.4% to 7,162 points, which marked its lowest close since October 1982. The index has now lost more than half its value since the beginning of the year as margin calls and actual and expected redemptions continue to force global investors to liquidate their stock holdings.
In a filing with the US Securities and Exchange Commission, MUFG stressed that its deposit and customer base is still strong and added that the capital reinforcement is meant to make its financial base more stable and to allow for further corporate growth as a global financial group. In the three months to June, the first quarter of the current fiscal year, MUFG reported a net profit of Yen51.2 billion – about a third of the Yen151.3 billion generated in the same period a year earlier, but far better than the losses reported by its US and European peers. The Japanese bank is also projecting a net profit of Yen270 billion in the six months to September and a Yen640 billion profit for the full year to March 2009. If realised, the latter would be a modest 0.5% improvement from the previous year.
However, rather than take the pre-emptive capital raising as a sign that the company remains on top of the financing game, the market appeared spooked by the need for this much capital and MUFG’s share price fell 14.6% in Tokyo trading to ¥583, its lowest close in 26 years. Part of the sell-off was said to be due to concerns about dilution, although the share price has lost 31% over the past four sessions which shows the bank was under pressure even before this move. The actual announcement of the share sale didn’t come until after the Tokyo market closed, but the news had leaked and was reported by the Nikkei newspaper on Monday morning.
Following the confirmation of the planned sale, MUFG’s New York-listed shares fell 13.7% to $6.07.
Ratings agency Standard & Poor’s may have added to the concerns with a statement saying “the recent slowdown of Japan’s economy and falling stock prices are increasing pressure on MUFG’s asset quality”. As a result, it said, the capital raising won’t result in a change in either MUFG’s rating or the outlook for that rating.
The Japanese bank said it plans to raise ¥600 billion ($6.4 billion) from the sale of common shares in the 12-month period starting from November 4. While it didn’t specify the actual timing, it is likely that it will try to complete the sale as soon as possible to prevent creating an overhang on the stock. The new shares account for about 9.4% of MUFG’s current market capitalisation of ¥6.37 trillion. Given the shaky global market environment and the almost total lack of risk appetite among investors, it would probably also not be a bad idea to approach potential buyers while the outlook for Japanese banks is still relatively positive. The final terms will be set closer to the time of the actual sale. According to Reuters, the transaction will be arranged by Morgan Stanley, Mitsubishi UFJ Securities and Nomura Securities.
MUFG will also sell ¥390 billion of preferred shares to third-party buyers who weren’t identified. The preferred shares have no voting rights and cannot be converted into common shares. According to the SEC filing, they will be issued at a price of ¥2,500 apiece and will pay an annual dividend of ¥115, representing a yield of 4.6%.
The preferred shares don’t have a specified maturity, but they can be bought back by the company after five years and four months at issue price.
Over the past couple of months, Japan’s cash-rich banks have replaced the sovereign wealth funds as primary providers of capital to the ailing investment banks in the US and Europe, with MUFG investing in Morgan Stanley in return for a stake of up to 21% and Nomura buying Lehman Brothers’ operations in Asia-Pacific and Europe after it filed for bankruptcy. However, MUFG’s sizeable capital raising – albeit aimed at replacing the cash it injected into Morgan Stanley, rather than to cover write-downs or credit losses – shows that Japan’s financial sector is unlikely to escape the turmoil of the global financial markets unscathed.
Indeed, domestic media reported yesterday that Japan's second-largest bank, Mizuho Financial Group, and third-ranked Sumitomo Mitsui Financial Group are also looking to raise fresh capital, sending both stocks tumbling towards the 15% limit. Mizuho finished 14.8% lower, while Sumitomo closed 11.5% down. According to the reports, they may seek as much as ¥500 billion each, although both banks said in separate statements that they had made no decisions regarding any capital raising plans.
While new capital should help the Japanese banks to ride out the current share price declines, the need for them to go hat in hand to investors may force them to be less ambitious when it comes to injecting capital into Western banks as a way of achieving expansion outside Japan. This could mean that yet another potential source of capital may be drying up. And then there is the question of who, among all this turmoil, will buy MUFG’s shares?
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