Japan bank agitator set to prove a sad point

Shiga Bank

06/05/2022 05:05

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Jennifer Hughes
    HONG KONG, May 6 (Reuters Breakingviews) - Spotting the
problems at Japanese banks is the easy part. Hedge fund
Silchester wants four of them to pay higher dividends using
income from their absurdly large equity portfolios. It would be
a sensible return of capital and help management focus on woeful
lending businesses. And that’s precisely why the campaigns face
an uphill battle.
    Silchester last week urged https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.silchester.com%2Fpdfs%2FSilchester%2520-%2520Bank%2520of%2520Kyoto%2520-%25202022-04-27%2520-%2520FINAL.pdf&data=05%7C01%7CThomas.Shum%40thomsonreuters.com%7Ca7825d89597447723bdc08da2e356848%7C62ccb8646a1a4b5d8e1c397dec1a8258%7C0%7C0%7C637873104163959500%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=FhfAbsvpDvWPZzL3kgODQcpXrXDDqCrsAZDpoTqEnDA%3D&reserved=0
 $3 billion Bank of Kyoto  8369.T  to distribute 100% of the
dividends it receives from $9 billion of holdings in Japanese
companies and half its profit from banking activities. The
London-based firm, which is Bank of Kyoto’s biggest owner,
threatened to call an extraordinary shareholder meeting if its
proposal isn’t put to a vote at the upcoming annual meeting. It
has asked for similar dividend changes https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.silchester.com%2Fpressrelease.html&data=05%7C01%7CThomas.Shum%40thomsonreuters.com%7Ca7825d89597447723bdc08da2e356848%7C62ccb8646a1a4b5d8e1c397dec1a8258%7C0%7C0%7C637873104163959500%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=YpG%2FiO%2BthQtygJbzITI2XvuzRy5x69ZBjx3UTIHdmuQ%3D&reserved=0
 from Bank of Iwate  8345.T , Shiga Bank  8366.T  and Chugoku
Bank  8382.T . 
    Japan’s smaller financial institutions have long struggled
with an ageing and shrinking population. Negative interest rates
have crushed lending margins too. It is also an overcrowded
market, with 84 listed banks. Regional pride makes them
resistant to mergers https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.breakingviews.com%2Fconsidered-view%2Fbank-of-japans-ma-fix-will-test-depth-of-slumber%2F&data=05%7C01%7CThomas.Shum%40thomsonreuters.com%7Ca7825d89597447723bdc08da2e356848%7C62ccb8646a1a4b5d8e1c397dec1a8258%7C0%7C0%7C637873104163959500%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=KUTj%2BuJiRQHqyE%2F1EEyISw7oUXEycD2qHThbwL%2BeK9E%3D&reserved=0,
 which would shrink costs.
    Each of the targets generates a return on equity below 3%,
bolstering Silchester’s case. Lenders should be making
profitable loans, not picking stocks. Bank of Kyoto earned 17.3
billion yen ($133 million) last year from equity stakes – 149 of
them as of March 2021 – against a net profit of 16.9 billion
yen. The investing doesn’t always pay off either: Shiga Bank’s
350 billion yen of shareholdings accounted for a tiny fraction
of its net profit, according to Silchester.
    Bank bosses have little incentive to support payouts that
would shine a spotlight on underlying problems. They are also
buttressed by a Japanese tradition, albeit a waning one, of
cross-holdings that have left Bank of Kyoto a top investor in
companies such as $53 billion Nintendo  7974.T . Bank of Kyoto
boss Nobuhiro Doi acknowledged in last year’s annual report https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.kyotobank.co.jp%2Finvestor%2Fannual%2Fpdf_annual%2Far2021_all.pdf&data=05%7C01%7CThomas.Shum%40thomsonreuters.com%7Ca7825d89597447723bdc08da2e356848%7C62ccb8646a1a4b5d8e1c397dec1a8258%7C0%7C0%7C637873104163959500%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=DAhw9Jv8q4%2B74I5VhfrUcvrTEwY8y7UAg2HijmLDOkc%3D&reserved=0
 the increasing investor inquiries about its stakes, and
unconvincingly defended the economic rationale.    
    Seasoned foreign investors in Japan will nod in agreement
with Silchester and simultaneously shrug at its chances of
persuading the board or a majority of shareholders. Despite some
plodding changes in corporate governance, being right in Japan
is less than half the battle.
    Follow @JennHughes13 https://twitter.com/JennHughes13 on
Twitter
    
    CONTEXT NEWS
    - Hedge fund manager Silchester on April 27 urged Bank of
Kyoto to modify its dividend policy to pay out all the income it
receives from equity holdings and half the income from its core
banking business. The firm said it would call an extraordinary
general meeting if the bank does not put the matter to a vote at
the annual general meeting.
    - Silchester owns 6.2% of Bank of Kyoto and is also the
largest investor in Bank of Iwate and Shiga Bank. All three
banks own equity portfolios that exceed their individual market
values. The London-based fund also holds 5% of Chugoku Bank,
whose equities are worth about 60% of its market capitalisation.

 (Editing by Jeffrey Goldfarb and Thomas Shum)
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