WSJ.com - Many Ailing Banks in Japan Lean on Old Friends for Help December 5, 2002 PAGE ONE BANKING CRISIS • Japan Nears Momentous Hire for Central-Bank Governor2 12/03/02 • Japan Announces Timetable to Clean Up Banking System3 12/02/02 • Japan to Set Up Framework For Fund Injection Into Banks4 1/27/02 • Banks Tackle Bad Debt Ahead of Government Action5 11/25/02 Many Ailing Banks in Japan Lean on Old Friends for Help Local Ties May Only Delay the Inevitable As Tokyo Seeks to Weed Out the Losers By PHRED DVORAK Staff Reporter of THE WALL STREET JOURNAL TOCHIGI, Japan -- An official of Ashikaga Bank Ltd. late last year visited the bamboo-lined campus of Kokugakuin University Tochigi here to discuss a fund-raising drive. But it wasn't the college asking for money. It was the banker. In Japan's decade-long financial debacle, Ashikaga's problems are typical: a mountain of bad loans, a plummeting share price and rumors of impending collapse. As the government preaches free-market reforms to fix the system, ailing lenders such as Ashikaga are propping themselves up by tapping healthy customers for funds. The university was a good target. Kokugakuin Tochigi had $65 million in savings in the bank. And four decades ago Ashikaga had lent the school start-up money when nobody else would. "That's why we exist today," says vice-chancellor Yoshinari Kimura, a square-jawed 70-year-old, who remembers that first loan. In January, responding to the bank's appeal, the school gave the bank $2 million for new Ashikaga shares. As Japan wrestles with a crisis that has cost banks $657 billion so far in losses from bad loans, the government in Tokyo is starting to say that market forces should be allowed to weed out the weak. Heizo Takenaka, the new minister of economy and banking, is crafting a cleanup plan for the country's biggest lenders that could force them to be much tougher on their borrowers than they are now. Those banks extend about 40% of all loans in Japan and hold about half of all the bad debt. Some lenders might be nationalized; big companies could go bust. Regulators also are hurrying to shut down weak credit unions and co-operatives -- to the distress of the small businesses that borrow from them. Overall, these changes mean cutting the complex ties that have bound and preserved banks, corporations and communities since the nation's postwar reconstruction. But in Tochigi prefecture and many other places, tradition and desperation have produced an alternative survival plan: Customers with money to spare are helping bail out their banks. And banks in turn are helping support troubled customers. In the past year in Tochigi, the mountainous region north of Tokyo where Ashikaga is based, the prefectural government has bought $2.4 million of shares in the bank. Camera maker Nikon Corp., which has three factories in Tochigi, has pitched in more than $750,000 for the share-buying drive. Other helpful investor-clients have included beauty salons and pinball-machine makers, Toyota dealerships and department stores. In all, Ashikaga has gotten $242 million of capital from 12,055 customers in the past year -- on top of a similar 1999 bailout that netted $345 million. Local governments and businesses own about 60% of Ashikaga, with the rest held by big international companies and investors. Ashikaga accounts for almost half of all loans and deposits in Tochigi prefecture. The bank's share of local lending is growing, as bigger banks retrench and smaller financial institutions go under -- six failed in Tochigi last year. So far, the mutual-support strategy has been a short-term solution, and it's unclear how much longer it can work. After Mr. Takenaka, the bank minister, finishes his plan for large lenders, he'll try to fix smaller banks such as Ashikaga. Meanwhile, some of the bank's client-investors are getting anxious, especially after a Japanese economic weekly recently rated Ashikaga the nation's second-most-troubled bank out of the country's 125 lenders. "We can't have this kind of thing dragging on forever," says Shintaro Yoshizawa, president of a limestone quarry that has sunk $1 million into Ashikaga shares since 1999. "but we're all wrapped up with each other in these extremely sentimental, tangled relationships." Almost all of Japan's major banks and lots of smaller ones have successfully hit up their customers for investment in the past five years. Ashikaga's biggest shareholder, the giant Bank of Tokyo-Mitsubishi, has provided Ashikaga with a line of credit of more than $806 million for the bank to use in case of emergency. The banks are also working to keep afloat many of their own troubled clients. Ashikaga has even found itself playing travel agent to drum up business for struggling borrowers involved in Japan's hot-spring spa resorts. Some 80% of these spa borrowers are classed as loan delinquents. "We are one with our customers," says Kunihiro Ono, a manager in Ashikaga's planning department. "If our customers' businesses don't improve, we're sunk, too." The bank's complex relationship with clients who are also shareholders creates conflicts. At a shareholders' meeting in June, irate investors protested Ashikaga's weak earnings, but as they were borrowers, too, they also howled about a new campaign to boost profit by raising interest rates. Prosperous Region Ashikaga started out 107 years ago lending money to silk-spinners in Tochigi and neighboring Gunma prefecture. Tochigi is now a fairly prosperous region of two million, home to factories of some of Japan's largest companies, such as Honda Motor Co. After World War II, when money was tight, the bank helped the national rebuilding effort with loans to nearby municipalities. Town halls reciprocated by giving Ashikaga all their business -- from deposits to tax collection. As Tochigi's economy followed a nationwide trend in shifting to manufacturing from homelier trades such as silk and rice, the bank's importance as the major local provider of funds grew. Today, Ashikaga is the official banker for all 49 of Tochigi's cities, towns and villages. In the prefectural capital of Utsunomiya, 75-year-old Kiyoshi Fujii, chairman of building-materials vendor Fujii Sangyo Corp., notes some signs of Ashikaga's pervasive influence. Hanging on his office wall is an oil painting of two mountains that an Ashikaga executive persuaded Mr. Fujii to buy from another bank client. The Tochigi Industry Council, comprising 91 heads of the biggest local companies, is based on the fifth floor of Ashikaga's headquarters. Mr. Fujii, one of the community's most prominent businessmen, says he persuaded the bank to provide the space 25 years ago, since most members were already Ashikaga clients anyway. "I said, 'Everyone already does business with Ashikaga, and the guys that don't -- we'll just make them start,' " he recalls with a laugh. But by the mid-1990s, Ashikaga was in trouble. Like many other lenders near Japan's big cities, Ashikaga piled into the real-estate lending boom that trebled metropolitan land prices during the late 1980s -- and was flattened by delinquent loans when prices crashed in the 1990s. Shares of Ashikaga and other weak lenders plummeted in 1997, after Hokkaido Takushoku Bank, the biggest bank on the northern island of Hokkaido, collapsed. In the spring of 1998, Ashikaga got its first government bailout, a capital injection of about $242 million at current exchange rates. But that wasn't enough. By early 1999, a crackdown on bad loans tied mainly to the real-estate bust had driven Ashikaga's capital ratio -- the ratio of capital to assets and a key measure of financial strength -- to just a hair above the 4% regulatory minimum. Mr. Fujii and the Tochigi Industry Council rallied to Ashikaga's support, urging depositors to leave their money in the bank and heed the bank's plea to buy new shares. Tochigi prefectural officials also decided to invest, disturbed by reports that bankruptcies in Hokkaido soared after the area's main bank failed. Other local municipalities and businesses followed. Eventually, the national government pumped in $847 million in capital. Struggling Again But two years later, Ashikaga was struggling again. Saddled with $723 million in bad-loan losses, the bank asked customers for another round of investment. They agreed, although they decided to keep a closer eye on the bank. Mr. Fujii got a seat on Ashikaga's board. Local government officials and other investors formed an oversight panel. In return, Ashikaga played up its image as a generous creditor and promised to keep cash flowing to local communities. The city of Utsunomiya, for instance, asked Ashikaga to maintain its 80% share of lending to small businesses. "If the customer has any ability to improve at all, we'll support him," says Makoto Yasuno, head of the division handling defaulting or restructured borrowers -- renamed the "corporate-support division." One beneficiary is the hot-spring resort Shikisai, high in the mountains in western Tochigi. Located by Lake Chuzenji and the famous shrines of the city of Nikko, Shikisai has a dining hall fronted by two-story plate-glass windows, a pine-lined bathing room and 36 guest rooms. The resort was planned during the boom years of the late 1980s, when busloads of office workers packed local hotels. But by the time it was built with Ashikaga money in 1996, Japan was well into a decade of stagnation that cut the number of visitors to Nikko by 24% and the number of hotels by 20%. Now, business is so bad that restaurateurs on a recent afternoon were trying to snag lunch customers by hailing cars on the street. A more down-market resort, the Palm Springs Hotel, still stands empty six years -- and six auction attempts -- after it went bankrupt. Shikisai, which is getting only about half as much revenue on its rooms as it had initially planned, was passed to Ashikaga's restructuring team three years ago. Neither the bank nor the hotel will say how much Shikisai owes. But hotel-industry insiders say it's common for Japanese hotels to have so much debt and so little cash flow that it would take them a half-century or more to repay. "I thought the economy would recover, so I built the hotel and failed," says Kazuhiko Kamio, Shikisai's general manager. Glancing nervously at the Ashikaga banker sitting next to him, he quickly adds: "Well, I haven't failed yet." For Ashikaga, it's vital that Mr. Kamio and others like him succeed. About half the loans by the bank's Lake Chuzenji branch are to 15 big borrowers such as Shikisai, which each have millions of dollars on the line. Ten are handled by the eight-member team Ashikaga has set up to work out loans of its hot-spring clients. The team actually serves more as financial consultant and marketing adviser. Mr. Kamio recently asked the team to help find a cheaper source of the socks that top-end spas give guests to wear after a bath. Ashikaga found a supplier that sold them for about 16 cents less per pair than Shikisai had been paying, saving more than $4,000 a year. Ashikaga advised Mr. Kamio to haggle with the local power company for cheaper rates. Mr. Kamio even put beer bottles in the toilet basins so that each flush used less water. Hiroshi Tsukahara, the Lake Chuzenji branch manager, pleaded with Ashikaga's loan department to lend Mr. Kamio new money to build six luxury suites -- even though Shikisai had trouble paying back what it already owed. Recently, Mr. Tsukahara persuaded the president of a bridal-furnishings store to spend a vacation at Shikisai. The president already banked at Ashikaga, had received business introductions from Ashikaga and had bought Ashikaga shares -- and so she willingly obliged. All this assistance delights Mr. Kamio. "Going to the bank is actually a lot more helpful than fumbling around on sales calls," he says. Meanwhile, Mr. Kamio is hammering out his third business plan in three years. He concedes that the last one was too optimistic, since it was based on occupancy estimates of 2.7 guests per suite per night, even though each suite has only two single beds. Still, Messrs. Kamio and Tsukahara vow they can get the numbers to come out right and keep Shikisai in business. Each man's neck is on the line. "If I don't become a model for success, Mr. Tsukahara will be in an embarrassing position," says Mr. Kamio, looking sheepishly at the other man. "It'll work," Mr. Tsukahara replies firmly. "You'll be one of the winners." Write to Phred Dvorak at phred.dvorak@wsj.com.1 URL for this article: http://online.wsj.com/article/0,,SB1039041695870253913.djm,00.html Hyperlinks in this Article: (1) mailto:phred.dvorak@wsj.com. (2) http://online.wsj.com/article/0,,SB1038868732534524993,00.html (3) http://online.wsj.com/article/0,,SB1038766897109360753,00.html (4) http://online.wsj.com/article/0,,SB1038453455305884388,00.html (5) http://online.wsj.com/article/0,,SB1038219061862220468,00.html Updated December 5, 2002 Copyright 2002 Dow Jones & Company, Inc. All Rights Reserved Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws. For information about subscribing go to http://www.wsj.com