Published February 24, 2009

Collapse of lender shocks Japan

Debt-ridden SFCG goes under, financial institutions' health under scrutiny

By ANTHONY ROWLEY
IN TOKYO

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THE failure of medium- sized Japanese finance company SFCG, coupled with fears about the fate of Citigroup, sent the Tokyo stock market plunging to near its lowest level since the collapse of the bubble economy at one point yesterday.

SFCG's bankruptcy has raised wider concerns over the health of the financial system in Japan, analysts said.

With liabilities of 338 billion yen (S$5.5 billion), SFCG had the largest debts of any Japanese company to fail this year, including 71 billion yen owed to Citigroup. The listed finance firm, in which Deutsche Bank had a 7.2 per cent stake, also had 54 billion yen of debts outstanding to Shinsei Bank, one of Japan's top half-dozen banks.

Japan's leading banks have recently raised fresh capital to cushion against the still spreading shocks of the global financial crisis, and the Japanese government has moved to protect regional banks by the use of guarantees included in its total 75 trillion yen stimulus packages.

But non-bank finance companies in Japan have no such backstop support and their chances of raising fresh capital in the currently depressed Tokyo stock market are seen as slim. SFCG chairman Kenshin Ohshima said yesterday that procuring funding had become 'almost impossible' of late.

The shares of other independent Japanese finance companies including Orix and Takefuji fell sharply in the wake of SFCG's bankruptcy announcement, although bank-linked firms including Acom and Promise fell less sharply. An index tracking listed non- bank lenders meanwhile slumped to its lowest level since 1983.

Hit by the firm's collapse and by reports that the United States government may take a stake of up to 40 per cent in Citigroup, Tokyo's benchmark Nikkei 225 stock average closed 40.22 points or 0.5 per cent lower yesterday after nearing a post-bubble economy low at one point during the day.

SFCG, whose shares will be delisted next month, specialised in lending to smaller Japanese companies and saw its loan portfolio deteriorating rapidly as Japan's economy plunged into deep recession. Corporate bankruptcies in Japan are spreading from sectors such as property and construction across a wide spectrum of business and fears for the health of the Japanese financial sector in general are growing.

A record 33 publicly traded companies in Japan declared bankruptcy last year as banks cut lending and consumer spending dropped, Bloomberg reported. Biggest among these was Hiroshima-based real estate developer Urban Corporation with 256 billion yen of debt. Total corporate bankruptcies in Japan rose by 16 per cent to 1,360 cases in January compared with their level a year earlier.

With the sharp rise in corporate bankruptcies, concern is mounting over the possible reappearance of major problems with non-performing loans in Japan. The impact of falling asset prices on capital has not become obvious in the case of regional banks, which have been allowed to discontinue marking assets to market for the present.

But the problems now appearing among non- bank lenders such as SFCG suggest that regional banks may not be immune form trouble, analysts said.