Japan Banks Trail Peers on Dividends as M&A Hunt Prevails

Jul 02, 2014 9:20 pm ET

(Updates with today’s shares in the 13th paragraph.)

July 3 (Bloomberg) -- Japan’s biggest banks, which posted record earnings last year, are less generous than their global peers in sharing profits with investors while they search for more takeovers abroad.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. paid an average 22 percent of profit to shareholders in the year ended March, data compiled by Bloomberg show. That trailed not only the 32 percent mean dividend payout ratio at Nikkei 225 Stock Average companies but also the 48 percent level at the world’s 40 largest banks by market value for which data are available.

The Japanese banks, which sold shares and hoarded profits after the global financial crisis dented their balance sheets, have been expanding overseas as weak credit demand and shrinking interest rates hamper lending income at home. After spending at least $14 billion on acquisitions abroad over the past five years, none of the three has clinched a major deal in 2014.

“The biggest theme for Japan’s megabanks is growth investment versus shareholder returns as they’ve passed the period of building equity,” said Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo. “They need to balance the two, but I think they want to spend more on overseas takeovers to make the most of the chance of a lifetime.”

For the year ending March 2015, the Tokyo-based banks plan dividends equivalent to an average 26 percent of profit, according to data from the companies. Their presidents said in May that they want to lift the dividend payout ratio to 30 percent. None of them announced plans to buy back their own shares, another way to return capital to investors.

Best Balance

The banks pledged to steadily increase shareholder returns by improving profitability, including through expansions abroad.

“We aim for stable increases in dividends per share as we boost earnings capacity, with overseas mergers among the drivers, while maintaining substantial capital to meet global financial regulations,” said Yuji Okumura, a spokesman for Mitsubishi UFJ, Japan’s biggest bank.

Sumitomo Mitsui will “consider deals that will help us become a global financial institution that leads Japan and Asia,” said Tomoyuki Narita, a spokesman for the country’s second-largest lender by market value. The bank will use capital effectively while keeping enough to stay healthy, he said.

“We will continue to pursue the best balance between maintaining stable capital and providing steady returns to shareholders,” said Mizuho spokeswoman Masako Shiono. “To implement our overseas strategy, we will consider various options including investments.”

‘Be Patient’

Investors at Mizuho’s annual general meeting last month expressed dissatifaction with its plans to raise dividends by 0.5 yen to 7 yen this fiscal year, said shareholder Yoshitaka Miyake, 78, who attended the gathering.

“Shares won’t rise unless the bank considers further dividend increases and buybacks, but I don’t have hopes for that,” according to Miyake, who said he holds 40,000 shares that he bought more than 10 years ago. “I’ll just have to be patient.”

Mizuho President Yasuhiro Sato told the June 24 meeting that capital at Japan’s third-biggest bank has reached the level that can support its growth plans. The company will target a 30- percent dividend payout ratio “to make our stance on shareholder returns clearer,” he said.

Shares Fall

Shares of the three banks fell today and have underperformed the Nikkei 225 this year. Mizuho slipped 1 percent at 10 a.m. in Tokyo, extending this year’s decline to 9.7 percent. Mitsubishi UFJ dropped 1 percent and is down 9.4 percent in 2014. Sumitomo Mitsui lost 0.5 percent, taking this year’s slump to 21 percent. The Nikkei 225 retreated 5.6 percent in 2014 from a six-year high reached on Dec. 30.

The banks raised about 5 trillion yen ($49 billion) by selling shares from December 2008 through July 2010 as global regulators pushed for greater capital buffers to avoid another crisis. Their retained earnings more than doubled to 12.8 trillion yen in the five years through March 2014 as profit rose on an economic recovery. Combined net income reached a record 2.5 trillion yen last fiscal year, driven by fee income and asset-valuation gains stemming from Japan’s stock rally.

Major banks accumulated capital regardless of market expectations for higher payouts and will probably use it for acquisitions this fiscal year, according to Nana Otsuki, an analyst at Bank of America Corp. in Tokyo. “The first deal this year could be a major share price catalyst as it would give an indication of bank attitudes toward acquisitions,” she said.

Basel Met

Capital ratios at the three lenders are already higher than 7 percent of risk-weighted assets, the minimum required by international rules known as Basel III, as well as additional buffers for the most systemically important global banks. Mitsubishi UFJ had an 11.1 percent common equity Tier 1 ratio at the end of March, and Sumitomo Mitsui’s was 10.3 percent, company figures show. Mizuho’s was 9.1 percent.

The banks have been expanding overseas to counter the slimmest net interest margins in Asia.

Mitsubishi UFJ bought Meridian Fund Services Bermuda Ltd., a fund administrator, in May for an undisclosed sum, the only overseas takeover by a Japanese megabank this year. The lender, which owns San Francisco-based UnionBanCal Corp., is studying acquisitions in the U.S. as it seeks to become a top-10 bank there, people familiar with the matter said in March.

Return More

The bank would “seriously consider” acquisitions in Indonesia and the Philippines, Deputy President Masaaki Tanaka said in an interview in February. In December, Mitsubishi UFJ bought a $5 billion controlling stake in Thailand’s Bank of Ayudhya Pcl, its biggest purchase in Asia outside of Japan.

“Mitsubishi UFJ’s dividends aren’t big,” Mitsuhiro Hashigaya, a 42-year-old employee of an information technology company in Tokyo, said after attending the lender’s shareholder meeting on June 27. “If it has money to spend on overseas investments, I want it to return more to us,” said Hashigaya, who held onto Mitsubishi UFJ’s shares even when the price tumbled following the global crisis.

Sumitomo Mitsui would be open to buying BNP Paribas SA’s U.S. unit if it wishes to sell, Chairman Masayuki Oku said in an interview on June 5. The French bank pleaded guilty to U.S. sanctions violations on June 30 and agreed to pay a record $8.97 billion as part of a settlement with prosecutors. Sumitomo Mitsui bought 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion last year.

Mizuho has been less acquisitive overseas than its larger rivals. The lender sought a stake in PT Bank Pan Indonesia from Australia & New Zealand Banking Group Ltd., though talks stalled over board representation, three people with knowledge of the matter said in January. Mizuho bought failed German lender WestLB AG’s Brazilian unit in 2012 for an undisclosed price.

“Long-term shareholders will be happy as long as banks get good deals and grow, even if they didn’t get much in dividends,” said Deutsche Bank’s Yamada. “The current climate for mergers and acquisitions allows Japan’s megabanks to cherry- pick because there aren’t many foreign rivals to compete with.”