The Sumitomo Bank, Limited
The Sumitomo Bank, Limited
Assets: ¥64.67 trillion (US$487 billion) (1998)
Stock Exchanges: Tokyo Osaka Paris London
Ticker Symbol: SUBJY (ADR)
SICs: 6081 Branches & Agencies of Foreign Banks; 6712 Offices of Bank Holding Companies
Once the banking division of one of Japan’s largest and oldest zaibatsu conglomerates, The Sumitomo Bank, Limited is one of the largest financial institutions in the world and ranks number two among Japanese banks, trailing only Bank of Tokyo-Mitsubishi Ltd. Offering wholesale, retail, and investment banking services, Sumitomo Bank has more than 350 offices in Japan and 92 overseas branches, offices, and subsidiaries in about 30 countries. Sumitomo is the central coordinating body for the now-independent but former zaibatsu members of the Sumitomo group and has assumed the new identity of keiretsu (banking conglomerate).
The Sumitomo group of enterprises is one of the oldest surviving business entities in the world, dating to the early 1600s. Sumitomo was originally founded near Kyoto as a medicine and book shop. The discovery by a family member of a new method for copper smelting led the company into the expanding and highly profitable copper trade. The acquisition and development of large copper mines had made Sumitomo one of Japan’s largest companies by 1868, when battling clans restored the Meiji emperor to power.
Although Sumitomo supported the losing side in that struggle, the company managed to develop good relations with the new government and later purchased some state enterprises as part of a national modernization campaign. As the company grew, Sumitomo’s director general, Teigo Iba, advocated diversification into new fields of business. Flush with money from Sumitomo’s copper operation, Iba set up a banking division in 1895 called the Sumitomo Bank.
Acting as the private banker for the ever-expanding Sumitomo enterprises, the Sumitomo Bank experienced smooth and rapid growth. In 1912, in need of further capital, the bank was incorporated and made a share offering. In doing so it became the first Sumitomo division to go public. Between 1916 and 1918 the bank established branch offices in San Francisco, Shanghai, Bombay, New York, and London, and an affiliate, the Sumitomo Bank of Hawaii.
Japan emerged as a major world power following its victory in the Russo-Japanese War in 1905 and, later, after World War I. This new prestige afforded companies like Sumitomo new business opportunities throughout Asia as Japan became a colonial power on par with Great Britain, the United States, the Netherlands, and France. The Sumitomo Bank established an interest everywhere the Sumitomo group went—Korea, Formosa (Taiwan), and China.
The Sumitomo Bank spun off a division of its own in 1923, when its warehousing arm was incorporated as the Sumitomo Warehouse Company. Two years later the Sumitomo group broadened its financial activities by taking over the management of Hinode Life Insurance, which was renamed Sumitomo Life Insurance the following year. Despite the creation of separate Sumitomo corporations—Sumitomo Machinery Works, Sumitomo Fertilizer Works, Sumitomo Mining, and so on—the Sumitomo group remained a closely knit conglomerate called a zaibatsu (literally, a “money clique”) whose constituent companies owned collective majorities of shares in each other.
The power of the various zaibatsu was greatly resented by a quasi-fascist element in the military that rose to power during the 1930s. Advocating Japanese supremacy in Asia as well as a more equitable distribution of wealth, these militarists were bent on the eventual nationalization of the zaibatsu. But because the zaibatsu made up Japan’s military-industrial complex, they were essential to the militarists’ plans for conquest.
The zaibatsu were uncomfortable in their cooperation with the militarists: they stood to profit from Japan’s expansion, but they also faced disintegration if the plan worked. Nonetheless, the Sumitomo Bank helped to finance the military’s preparation for combat. Many Japanese considered the war a patriotic cause, seeking to remove western imperialists from Asia. But most Japanese companies, regardless of their reservations, were treated according to their cooperation with the militarists after World War II, and the Sumitomo companies were no exception.
Despite the militarists’ desires, the Sumitomo group, having taken over a number of formerly independent or associated companies, became larger and more concentrated as a result of the war. After the war the Allied occupation authority imposed a series of antimonopoly laws that broke the zaibatsu into hundreds and even thousands of smaller companies. Each was forbidden to use its prewar name or to engage in cross-ownership of stock. The Sumitomo Bank was reorganized under this plan in 1948 as the Bank of Osaka.
A relaxation in industrial laws in 1949, and again in 1952, permitted the former Sumitomo companies not only to conduct business with each other, but also to resume use of the Sumitomo name and cross-ownership of stock. The zaibatsu re-formed, and the Sumitomo Bank became its coordinating entity.
The man placed in charge of the company after the war was Shozo Hotta, who believed that the bank should differentiate itself from other banks by emphasizing business efficiency. He also personally evaluated business ventures that he felt the Sumitomo Bank should back. As the bank grew during the 1950s, it became better able to support larger industrial ventures such as Matsushita Electric, Toyo Kogyo, and Daishowa Paper. Many of these investments were highly successful, particularly the Matsushita venture. During Japan’s first period of export-led growth, from 1955 to 1965, Matsushita grew several times over to become the nation’s largest electronics manufacturer.
Adopting the new goal of “quality and quantity,” the Sumitomo Bank expanded its corporate business, recognizing the diminishing opportunities for growth from its historical affiliates such as NEC, Matsushita, and other Sumitomo companies. In addition, much of the bank’s business was concentrated in the Kansai area around Osaka, leaving Tokyo and Yokohama, both rapidly growing markets, largely unexploited by Sumitomo.
In a separate effort to expand, the Sumitomo Bank merged with the Kawachi Bank in April 1965. Retaining the Sumitomo name, the banks’ combined deposits surpassed those of their competitor, Fuji Bank.
Hotta was named chairman of the bank in 1971, when he was replaced as president by Koji Asai. Asai and his successor, Kyonosuke Ibe, each had a comparatively short tenure, Ibe being replaced by Ichiro Isoda. Although Hotta was removed from the day-to-day administration of the bank, the organization strongly reflected his personality: bureaucratic and authoritarian. Often described as the father of the restoration of the Sumitomo Bank, Hotta had nevertheless created for it a poor public image, which Isoda was determined to change.
Toyo Kogyo and Atake Crises, 1970s
Higher earnings permitted the bank to increase lending to Matsushita, Toyo Kogyo, and Daishowa, as well as to companies outside the Sumitomo group such as Idemitsu Kosan, Uraga Dock Company, Taisho Pharmaceutical, and Ataka & Company. Again, many of these investments were highly profitable. Those to Ataka, Daishowa, Uraga, and Toyo Kogyo, however, were not. Toyo Kogyo, in particular, was in very serious condition. The manufacturer of Mazda trucks, Toyo Kogyo had bet its future on the success of the Wankel rotary engine, a prewar German design that was supposed to be highly fuel efficient. It proved otherwise, and became a costly problem for Toyo Kogyo, especially in combination with the 1973-74 oil crisis. Sumitomo nevertheless supported Toyo Kogyo during its reorganization.
The Sumitomo Bank will be the leading provider of the highest quality financial products and services to our customers on a worldwide basis to gain and maintain their respect and confidence. We will also be a consistent contributor to the development of our local, national and global community through maintaining long-term steady growth. In order to achieve this, we are committed to the following principles: to give the top priority to our customers and to respond to their needs; to respect our staff as individuals and to create an open and challenging work environment; to consistently stimulate positive thinking, innovation, creativity and efficiency in our business practices; to provide opportunities for the personal development of our staff in which keen insight, pride in our work, professionalism and integrity are fostered; to ensure the highest standards of sound management and ethical conduct throughout our bank and fulfilling our social responsibility and increasing public trust in us.
More serious, however, was the impending failure of Ataka & Company, a major Japanese trading firm. Because it stood to lose substantial amounts of money if Ataka went bankrupt, the Sumitomo Bank pledged to support Ataka until it could again be made solvent. Hotta entrusted Isoda with responsibility for rehabilitating Ataka. Isoda in turn appointed Yasushi Komatsu, managing director of the bank, to head Ataka. A more outgoing, congenial man than Hotta, Isoda enlisted help from the Ministry of Finance, the Bank of Japan, Ataka’s customers, and even competitors of the Sumitomo Bank. Under a coordinated effort, Ataka was completely restructured; its unprofitable and under-performing divisions were sold off and cost-cutting procedures were initiated for those that remained. A year after assuming control over Ataka, the bank arranged a merger with C. Itoh, Japan’s largest general trading company.
The Sumitomo Bank’s handling of the Toyo Kogyo and Ataka affairs greatly enhanced its image among business and government leaders, as well as with the public. The bank’s character changed at a crucial time, as the Japanese economy was entering a period of stable growth. A buyer’s market emerged in banking, and with little remaining room for growth, each bank was forced to compete vigorously for market share. Had Isoda tried to cut losses by permitting both companies to go bankrupt, the bank would almost certainly have lost major clients to competitors. Instead, Sumitomo demonstrated an unusual degree of dedication to its customers and won more confidence than any advertising campaign could have hoped to generate.
The company’s ability to support its clients through hard economic times was tested in the late 1970s when the industrial base in Kansai began to deteriorate. The textile industry, long in a state of decline in Japan, finally felt the effects of cheaper foreign competition. Within the Sumitomo group, business was down for Sumitomo Light Metals, Sumitomo Cement, Sumitomo Metal, and Sumitomo Chemical.
Still, by this time, the Sumitomo Bank had become Japan’s largest bank in terms of deposits. That position was later lost, however, not due to a failure in business, but due to the merger of the Dai-Ichi Bank and the Kangyo Bank, forming Dai-Ichi Kangyo Bank. A similar merger between Sumitomo and the Kansai Sogo Bank was cancelled in 1978 because the resulting bank would have been too deeply influenced by the Kansai economy.
Reorganized in 1979
In 1979 the Sumitomo Bank carried out a general reorganization on the recommendations of the American consulting firm MacKenzie & Company. The bank was divided into four divisions: business, sales, international, and planning and administration. In addition, greater freedom was given to division heads in order to achieve greater decentralization.
Isoda ordered the expansion of international financial services and the establishment of an in-house securities business. Toward that end, Sumitomo purchased the Swiss Banca de Gottardo in February 1984, and later became the leading Japanese bank in foreign markets. Meanwhile, the bank rescued another troubled company in the early 1980s when it helped turn around Asahi Breweries, Ltd.
Isoda became chairman in 1983, when he was replaced as president by Koh Komatsu, an imaginative manager who had distinguished himself during the 1960s by rehabilitating Sumitomo’s operations in California.
In 1986, observing Citicorp’s experience with bank competition in the United States, Komatsu decided that Sumitomo needed to diversify its customer base geographically. Having made little progress moving into Tokyo, the bank proposed a merger with an established institution in the region. The partner bank eventually settled upon was the Heiwa Sogo Bank, an institution with about 100 branches that operated until 7:00 P.M.—four hours later than other banks.
1986 Goldman, Sachs & Co. Investment
Sumitomo, already an established leader in international banking and finance, announced in December 1986 that it had made a $430 million, or 12.5 percent, investment in the New York-based investment bank Goldman, Sachs & Co. The investment, which amounted to a controlling interest, greatly alarmed American banks, which charged that a foreign competitor had been permitted to enter a field the Glass-Steagall Act had barred American banks themselves from. The Federal Reserve later ruled that Sumitomo’s investment was legal, but that Sumitomo could not increase its interest, exercise management rights, or expand to other countries.
Trouble came for Komatsu the following year, when reports of friction among bank divisions and depressed earnings led the board of directors to replace him as president with Sotoo Tatsumi. The new president pledged to remove excessive layers of bureaucracy that had recently compromised the bank’s reputed speed and efficiency. Emphasizing a new competitive spirit, Tatsumi was charged with consolidating the gains made under Komatsu, to rationalize the company’s busy expansion of the previous year.
1990s Banking Crisis
From 1985 through 1989, Japan’s economy went through a period of extreme speculation as land prices and share prices soared beyond reason. When the “bubble” burst in the early 1990s, the banking industry in Japan was hit hard. Sumitomo Bank was no exception, and was one of the first to feel the effects. In October 1990 Isoda resigned as chairman, taking personal responsibility for the bank’s involvement in a stock manipulation scandal centering around Itoman & Co., an Osaka-based trading company with longstanding ties to the Sumitomo group. The bank operated without a chairman until early 1993 when Tatsumi took on that post with the appointment of Toshio Morikawa as president. Morikawa had served as vice president for international operations.
In January 1993, meantime, Sumitomo made the unprecedented move of writing off ¥100 billion (US$895 million) in bad loans, a number of them related to the Itoman affair. Another consequence of the 1990s Japanese lending crisis was an increase in violence against the country’s bank employees, incidents that were believed to be related to the banks’ attempts to collect bad debts from customers. Among the several incidents involving Sumitomo Bank was the September 1994 murder of the director of the bank’s Nagoya branch.
As the 1990s proceeded and the Japanese economy continued to stagnate, the banking crisis only deepened. For the fiscal year ending in March 1995, Sumitomo posted a net loss of ¥335 billion (US$3.8 billion), the first major Japanese bank since World War II to record a loss. The loss resulted from Sumitomo writing off ¥826 billion (US$9.4 billion) in bad loans, a precedent-setting move. Up until this point Japanese regulators had discouraged such writeoffs for fear of weakening confidence in the financial system. Sumitomo, however, wanted to move as quickly as possible to relieve itself of its bad-loan albatross.
In February 1996 Sumitomo Bank took over the U.S. commercial loan portfolio and offices of Daiwa Bank Ltd. in a US$3.37 billion asset transfer. The previous December U.S. regulators had ordered Daiwa to discontinue its U.S. operations following the disclosure of the bank’s involvement in a US$1.1 billion trading scandal. Subsequent discussions between Sumitomo and Daiwa about a full-scale merger were put on hold. Also in 1996 the bank opened a representative office in Shenyang, China, becoming the first Japanese bank to open an office in China. In addition, Sumitomo Bank began preparing for Japan’s “Big Bang,” which was announced in November 1996 and promised to comprehensively reform the Japanese financial system and open it up to international competition by 2001. Meanwhile, Sumitomo faced a new competitor following the April 1996 merger of The Mitsubishi Bank, Ltd. and Bank of Tokyo, Ltd. to form Bank of Tokyo-Mitsubishi Ltd., which became the new number one Japanese bank. Sumitomo Bank was number two.
In June 1997 Morikawa replaced Tatsumi as chairman, and Yoshifumi Nishikawa was appointed president. Continuing to resolve its bad loans burden, Sumitomo in September 1997 sold ¥40 billion (US$330 million) in problem loans to Goldman, Sachs. Unfortunately, that year also brought the beginnings of the Asian financial crisis, which saddled Sumitomo and other Japanese banks with additional bad debt from loans made in such troubled nations as Indonesia and South Korea. Furthermore, new disclosure rules forced Japanese banks to write off more bad loans. For the 1998 fiscal year, therefore, Sumitomo wrote off another ¥1.04 trillion (US$7.66 billion), leading to a full-year pretax loss of ¥502.7 billion (US$3.7 billion). More bad news came in February 1998 when the bank was one of several named in a scandal involving the bribing of Japanese finance ministry officials.
In anticipation of the “Big Bang,” Sumitomo Bank and Daiwa Securities announced in July 1998 a series of alliances in the areas of investment banking, derivatives, and asset management. In October 1998 Sumitomo exited from U.S. retail banking when it sold Sumitomo Bank of California to Zions Bancorp. In late 1998 the Japanese government attempted to mitigate the ongoing banking crisis by passing legislation allowing regulators to inject public money into banks that have depleted their capital through problem loan writeoffs. The bailout program eased fears about bank failures and appeared likely to counter the cautious business lending stance adopted by many Japanese banks. In November Sumitomo announced that it would apply for such an injection. In concurrence with its request for public money, Sumitomo was considering launching a tough restructuring program through which it would cut staff, close additional overseas branches, and initiate other cost-cutting efforts. Through such a restructuring and an infusion of money, it seemed possible that Sumitomo Bank might finally be able to relieve itself of its 1980s hangover.
Americas: Sumitomo Bank of New York Trust Company (U.S.A.); Sumitomo Bank Capital Markets, Inc. (U.S.A.); Sumitomo Bank Financial Services, Inc. (U.S.A.); Sumitomo Bank Leasing and Finance, Inc. (U.S.A.); Sumitomo Bank Investment Management (New York), Inc. (U.S.A.); Sumitomo Bank Securities, Inc. (U.S.A.); The Sumitomo Bank of Canada; Banco Sumitomo Brasileiro S.A. (Brazil); Central Pacific Bank (U.S.A.). Europe, Middle East and Africa: Sumitomo Finance International PLC (U.K.); Sumitomo Bank (Schweiz) AG (Switzerland); Sumitomo Finance (Middle East) E.G. (Bahrain); Banca del Gottardo (Switzerland); Sumitomo Bank (Deutschland) GmbH (Germany); Finanziaria Sumitomo (Italia) S.p.A. (Italy); Sumitomo Finance (Dublin) Limited (Ireland); SBCM Limited (U.K.). Asia and Oceania: Sumitomo Finance (Asia) Limited (Hong Kong); SBCM Limited Hong Kong Branch; Sumitomo International Finance Australia Limited; Sumitomo International Finance Australia Limited Melbourne Branch; Sumitomo Financial Futures (Singapore) Pte. Ltd.; SB Merchant Bank (Singapore) Limited; P.T. Bank Sumitomo Niaga (Indonesia); P.T. Exim SB Leasing (Indonesia); P.T. Bank Merincorp (Indonesia); P.T. Merincorp Securities Indonesia; China International Finance Company Limited; Sumigin Metro Investment Corp. (Philippines); Bangkok Sumigin Consulting Company (Thailand).
Principal Operating Units
Branch Banking Group; Corporate and Institutional Banking Group; International Banking Group; The Americas Division; Capital Markets Group; Treasury Group.
Baker, Gerard, “Sumitomo Bank Posts £1.8bn Loss in Wake of Bad Debts,” Financial Times, January 28, 1995, pp. 1, 18.
Brauchli, Marcus W., and Masayoshi Kanabayashi, “Exit of Sumitomo Chief Marks End of Era,” Wall Street Journal, October 15, 1990, p. A12.
Chandler, Clay, “The Bank That Broke with Convention,” Financial Times, May 26, 1995, p. 24.
______, “Sumitomo Bank Selects President in Bid to Surmount Troubled Past,” Wall Street Journal, April 29, 1993, p. A10.
Karmin, Craig, “Goldman Gets Jump with Japanese Banks,” Wall Street Journal, March 26, 1998, p. B13.
Neff, Robert, and William Glasgall, “An $8 Billion Write-off—And a Celebration,” Business Week, February 13, 1995, p. 56.
Sapsford, Jathon, “Japan’s Banks to Begin Signing Up for an Injection of Public Money,” Wall Street Journal, November 17, 1998, p. A17.
______, “Japan’s Latest Bank Plan Buoys Credit Hopes,” Wall Street Journal, October 8, 1998, pp. All, A13.
______, “Sumitomo, Daiwa Venture Looks Abroad,” Wall Street Journal, July 29, 1998, p. All.
Shale, Tony, “Sumitomo’s Dangerous Liaisons,” Euromoney, December 1990, pp. 16 +.
Shirouzu, Norihiko, “More Banks in Japan Implicated in Scandal,” Wall Street Journal, February 17, 1998, p. A14.
Tanzer, Andrew, “‘The Other Banks Feel Threatened,’” Forbes, October 2, 1989, pp. 80 +.
—updated by David E. Salamie