Sumitomo Mitsui Banking Corporation
Sumitomo Mitsui Banking Corporation
Sumitomo Mitsui Banking Corporation (SMBC) was formed from the 2001 merger of Sumitomo Bank and Sakura Bank—Sakura was known as Mitsui Bank until 1990. The merger created Japan’s second largest bank with 564 domestic branches and more than 20 international branches. SMBC provides a host of financial services including commercial and investment banking and credit-related services. Through its subsidiaries, SMBC also provides investment advisory and securities services along with research, data processing, and management consulting.
History of Sumitomo Bank
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, mostly 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. Loans 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.
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 ? 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.
Our mission is to provide optimum added value to our customers and together with them achieve growth; to create sustainable shareholder value through business growth; and to provide a challenging and professionally rewarding work environment for our dedicated employees.
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 canceled in 1978 because the resulting bank would have been too deeply influenced by the Kansai economy.
Reorganization in 1979
In 1979 the Sumitomo Bank carried out a general reorganization on the recommendations of the U.S. 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 U.S. banks, which charged that a foreign competitor had been permitted to enter a field the Glass-Steagall Act had barred U.S. 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 ($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.
- Mitsui Bank incorporates.
- Sumitomo Bank is established.
- Mitsui Bank merges with Dai-Ichi Bank to form Teikoku Bank.
- Sumitomo Bank is reorganized as the Bank of Osaka.
- A relaxation in industrial laws allows for the reemergence of the Sumitomo Bank.
- Teikoku Bank reverts to its former name, Mitsui Bank.
- Kawachi Bank merges with Sumitomo Bank.
- Mitsui Bank merges with Toto Bank.
- Sumitomo Bank makes a 12.5 percent investment in Goldman, Sachs & Co.
- Taiyo Kobe Bank merges with Mitsui to form Mitsui Taiyo Kobe Bank.
- Mitsui Bank changes its name to Sakura Bank.
- Japan announces a major reform of its financial sector.
- Sakura merges with Sumitomo Bank to form Sumitomo Mitsui Banking Corporation.
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 ($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 ($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 $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 $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 ($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 ($7.66 billion), leading to a full-year pretax loss of ¥502.7 billion ($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 had depleted their capital through problem loan write-offs. 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 considered launching a tough restructuring program through which it would cut staff, close additional overseas branches, and initiate other cost-cutting efforts. Surrounded by intense competition and staggering losses, Sumitomo entered the merger arena in 1999 when it teamed up with Sakura Bank.
History of Sakura Bank
It is commonly believed that the Mitsui zaibatsu, or conglomerate, started its business as a bank. In fact, the company began trading in textiles and entered banking only after Takatoshi Hachirobei, a founder, decided in 1683 that currency would soon replace the barter system. That year Mitsui purchased a money exchange. This exchange began a slow, steady expansion after its appointment as the Tokugawa government’s fiscal agent in Osaka. Mitsui’s dry goods business, meanwhile, declined steadily due to poor management.
In the mid-1860s, Mitsui switched its allegiance to rebel Meiji forces from the failing Tokugawa government, which had repeatedly levied costly tax assessments against the company. After the restoration of the Meiji emperor, Mitsui lobbied for and won a highly favored status in government. By the early 1870s, Mitsui held so much money for the government that it was basically a state treasury.
Rizaemon Minomura, the Mitsui director who was the architect of the company’s rise to power, strongly advocated moving the firm to Tokyo, the new center of government and commerce. Once there, Mitsui began taking a more active role in underwriting industrial ventures. After an initial failure in international trading, Mitsui built up a domestic trading network and secured several government and military contracts. Reentering international trade some years later, Mitsui established numerous foreign offices, and in 1876 the Mitsui Bank was incorporated as a separate entity.
The Mitsui Bank served as the exclusive finance agent for the Mitsui trading company, called the Bussan, which had discovered a new and highly profitable trade in cottons and textiles. But, unhappy with its increasingly costly dependence on rival Mitsubishi for shipping and warehousing services, the Mitsui Bussan created its own shipping company. A tremendous bout of competition between the two companies ensued, and Mitsui eventually lost. As the underwriter for the Mitsui Bussan, the Mitsui Bank emerged financially exhausted.
But the bank benefited greatly from its privileged position in government. In addition, the Mitsui companies experienced unprecedented growth after Hikojiro Nakamigawa, a talented businessman and former president of the Sanyo Railway, joined Mitsui Bussan in 1891. As senior director, Nakamigawa dismissed redundant personnel and launched a concerted effort to develop Mitsui’s industrial divisions. He also introduced the motto “people make Mitsui,” a clever response to its rival’s assertion that “organization makes Mitsubishi.”
Mitsui again profited from its involvement in a military conflict, this time the Sino-Japanese War of 1894-95. A recession following that war, however, halted the company’s growth. Furthermore, Nakamigawa died in 1901, leaving the directorship to his rival and predecessor, Takashi Masuda. Masuda emerged from years of semi-retirement determined to shake Mitsui out of stagnation. He introduced foreign exchange services, secured special trading rights for Mitsui in China, and even proposed purchasing Manchuria in 1911. Two years later he established a Chinese subsidiary, Chogoku Kogyo (China Industries Company).
Although it was a separate company, the Mitsui Bank was broadly influenced by the Mitsui Bussan and its directors; Masuda in many ways retained authority over the bank’s director, Shigeaki Ikeda. Ikeda distinguished himself at the bank by providing Masuda and his successor, Takuma Dan, with no surprises.
Mitsui at this time became a focal point for criticism by a right wing military faction that believed the zaibatsu should be destroyed because they had become too powerful. As a result of this group’s rise to power, Takuma Dan was assassinated in 1932. Masuda designated Ikeda, a more neutral figure, to run the Bussan and Naojiro Kikumoto was named chairman of the bank.
Renaming Mitsui As Teikoku Bank: 1943
When the militarists came to power, a centralization of power took place in industrial as well as government circles. Ikeda, in effect leader of both the Bussan and the bank, was named, in addition, governor of the Bank of Japan in 1937 and minister of finance and minister of trade and industry in 1938. He participated in the government’s policy of expansion, supporting the colonization of Manchuria and the war against China and, later, against the United States. The Mitsui Bank, meanwhile, was renamed the Teikoku Bank in 1943, following its merger with the Dai-Ichi Bank. Temo Akashi was named chairman of the new bank. The following year, Teikoku absorbed the Jugo Bank, at the time about one-tenth the size of Teikoku.
When World War II ended in 1945, Ikeda was designated a “Class A war criminal” and purged from public life by the occupation authority. He died in 1950 at the age of 84.
Chairman Akashi was replaced by Junshiro Mandai in 1945. Mandai and six others, however, resigned in 1946, shortly before the occupation authorities were to purge them as well. Kiichiro Satoh was then elected president of the bank. After the war the occupying authorities imposed a series of new industrial laws that eliminated the zaibatsu system by breaking the conglomerates into hundreds of smaller companies. The Dai-Ichi Bank was separated from Teikoku in 1948, and Teikoku was banned from reestablishing ties with former Mitsui companies. Teikoku, however, was designated an authorized foreign exchange dealer in 1949.
Growth Under the Mitsui Name: 1950s-60s
The bank was permitted to establish correspondent agreements with American banks in 1950, which laid the groundwork for the reestablishment of Mitsui’s international operations. After reopening offices in London, Bombay, and Bangkok, Mitsui incorporated an IBM punch-card computing system that permitted the bank to centralize more of its operations at its head office.
In 1954, following the relaxation of antimonopoly laws in 1949 and in 1952, Teikoku reverted to its former name, Mitsui Bank. Increasingly the Mitsui Bank began to conduct more business with the former zaibatsu companies. With an international network capable of assembling information on foreign markets in place, the zaibatsu began to re-form as a more loosely organized keiretsu, or banking conglomerate. This re-centralization of industry was permitted by the government to encourage faster recovery and industrialization because of a perceived threat from communists on the Asian mainland.
In the meantime, since the bank’s ability to grow was restricted by laws that prevented the establishment of more branch offices, Satoh led a campaign to increase deposits at existing branches. Satoh was made chairman in 1959 and was succeeded as president by Masuo Yanagi, a career Mitsui employee, who in 1961 initiated an effort to control the bank’s lending activities more efficiently. The rapid growth of the economy resulted in periods of simultaneous demand for loans and deposits; corporations borrowed as consumers spent. The addition of new consumer lending projects and the reestablishment of international banking activities resulted in greater liquidity and mobility and made the bank more competitive.
The Mitsui Bank continued to bring itself closer to the public by marketing financial products specifically for private savers. In 1968 it merged with the Toto Bank, a small, consumer-oriented bank whose 16 branches greatly strengthened Mitsui’s presence in Tokyo.
Kyubei Tanaka, who succeeded Yanagi in 1965, was himself succeeded in 1968 by Goro Koyama. Koyama presided over the widespread computerization of Mitsui and ordered the improvement of communications between branches to accommodate people who lived in suburbs but worked in the city.
Also in 1968, Mitsui participated with the Sanwa Bank in the creation of a national credit card company, the Japan Credit Bureau. In an effort to circumvent regulations limiting the number of a bank’s branches, Mitsui and the Heiwa Sogo Bank concluded an agreement to service each other’s customers, an agreement that was subsequently expanded to include other banks. During the early 1970s, the bank introduced automatic teller machines, which allowed depositors to withdraw money at any hour and greatly reduced labor costs for the bank.
A Decade Marked by Challenges: 1970s
The decision to remove the United States from the gold standard and the subsequent revaluation of the British pound had severe impact on the Japanese banking industry. The Mitsui Bank, which had grown heavily involved in international transactions, was forced to reorganize the following year. Although profits were squeezed, the bank’s capital and deposits reached new heights. Despite a second shock created by the OPEC oil embargo of 1974, the bank remained fairly stable, owing to conservative management and successful risk minimization.
Under President Joji Itakura and his successor Kenichi Kamiya, the Mitsui Bank became a much more business-oriented financial institution, participating in the establishment of special capital groups that oversaw the development of emerging companies breaking into expanding markets. One such venture included a 19-company collaboration on new software technologies. Through Bussan-sponsored monthly meetings, the Mitsui Bank coordinated its business with that of the approximately 40 members of the Mitsui Group, including Toshiba, Oji Paper, and Sapporo Breweries.
As Japan entered a period of lower, more stable growth in the early 1980s, the Mitsui Bank restructured in order to emphasize its business in the consumer and corporate fields and develop groups of market specialists. As part of the “Century Ten” plan, the restructuring was designed to make Mitsui a more competitive bank for the 1980s. Part of that strategy included a shift away from sheer volume (which was percentage oriented) toward more stable flat-fee business. The bank also introduced CMS, a cash-management system that linked its newly established continental headquarters in New York, London, and Tokyo. In response to the Sumitomo Bank purchase of an interest in the U.S. investment bank Goldman, Sachs—a move that greatly strengthened that bank’s position in international securities markets—the Mitsui Bank established closer relationships with Nomura Securities and Yamatame Securities.
Kamiya was promoted to chairman in June of 1988 and was succeeded as president by Ken-ichi Suematsu. The bank repeatedly named like-minded men to the presidency. While that contributed to greater stability and continuity in management policies, critics pointed out that it also created an army of yes-men. Regardless, the Mitsui Bank remained one of Japan’s largest financial institutions. In August 1989 Mitsui Bank and the Taiyo Kobe Bank announced that they would merge in April 1990 to form Mitsui Taiyo Kobe Bank, with about ¥40 trillion in assets and 108 overseas offices in 31 countries. The merger, which created Japan’s second largest bank, strengthen both banks’ positions in the rapidly changing financial world.
The Newly Merged Sakura Facing Challenges: 1990s
The newly merged bank was renamed Sakura Bank in 1992. Sakura, Japanese for “cherry blossom,” adopted the new name as part of its strategy to attract more customers. At the time, Japan’s banking industry as a whole was marked by intense competition brought on by local deregulation and a weakening domestic economy. To prepare for the challenges of the 1990s and beyond, Sakura adopted the phrase “ACT 1,” which stood for an aggressive, creative team effort.
Like Sumitomo, Sakura did indeed face distinct challenges. During 1992, pretax profits fell by 31.5 percent over the previous year, signaling rough times ahead. By this time, the Japanese banking sector faced criticism regarding bank exposure to nonperforming or bad loans. Distrust and uncertainty related to Japanese banking activity and poor investment policies surrounded Sakura, as well as other Japanese “city” banks. In 1995, the company posted huge pretax losses related to writing off bad loans. Japan’s economy worsened, leaving many companies in the retail, distribution, construction, and real estate industries unable to pay back loans.
In an attempt to get its finances back on track, Sakura turned to the members of its corporate family, the Mitsui keiretsu, for a $2.1 billion capital infusion in 1998. Meanwhile, the bank restructured operations and laid out a cost-cutting strategy that included layoffs and the closure of certain branch offices. As changes in the Japanese banking industry brought on consolidation and allowed for major mergers, Sakura elected to team up with competitor Sumitomo Bank.
The Merger: 2001
After forming a strategic alliance in 1999, Sumitomo and Sakura merged in 2001. The union cemented the new bank’s position as the second largest financial institution in Japan with US$791.65 billion in assets. Operating under the new name Sumitomo Mitsui Banking Corporation, the bank’s major concern was dealing with updating its business practices to reflect Japan’s financial reform.
This reform included revamping the Japanese banking industry to reduce or eliminate bank exposure to bad loans. The initiative was in part overseen by Japan’s Financial Services Agency (FSA). Just as the FSA reported that the major banks were financially sound, however, Japan’s four largest banks reported a combined loss of $22.7 billion in 2002. In September of that year, Prime Minister Junichiro Koizumi fired his chief bank regulator and named Heizo Takenaka to the post. An October 2002 Business Week article claimed that Takenaka felt that the banking system in Japan was “gravely ill and needing treatment.” As such, Takenaka immediately set a plan in motion to audit the major banks’ loan portfolios. At the time, these banks’ bad loans were estimated at US$430 billion, a figure that was considered to be significantly below the actual number.
Amid Japan’s bank reform, SMBC worked to integrate both Sakura and Sumitomo into one cohesive unit. Under the leadership of chairman Akishige Okada and President and CEO Yoshifumi Nishikawa, SMBC focused on improving its asset quality by resolving its problem loan issue. The company also looked to increase its earnings by promoting operational efficiency and by revamping certain business practices. While the new SMBC appeared to be on the right path to future success, the bank would no doubt face many challenges related to its nation’s banking and financial reform.
SMBC Staff Service Co. Ltd.; SMBC Learning Support Co. Ltd.; SMBC Center Service Co. Ltd.; SMBC Total Maintenance Co. Ltd.; Sumitomo Mitsui Card Company Ltd. (46.9%); SMBC Loan Advisor Co. Ltd.; Sakura Card Co. Ltd. (68.5%); The Japan Net Bank (57%); Sansei Guarantee Co. Ltd.; SMBC Leasing Company Ltd. (37.5%); SMBC Capital Co. Ltd. (39.8%); SMBC Mortgage Co. Ltd. (47%); SMBC Business Servicing Co. Ltd.; Sakura Investment Management Co. Ltd.; The Wakashio Bank Ltd.; Manufacturers Bank (U.S.A.); Sumitomo Mitsui Banking Corporation of Canada; Banco Sumitomo Mitsui Brasileiro S.A. (Brazil); PT Bank Sumitomo Mitsui Indonesia; Sumitomo Mitsui Finanz GmbH (Germany); SMBC Financial Services Inc. (U.S.A.); SMBC Capital Markets Ltd. (U.K.); Sakura Finance Australia Ltd.; Sakura Merchant Bank Ltd. (Singapore).
Resona Holdings Inc.; Mizuho Holdings Inc.; UFJ Holdings Inc.
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—updates: David E. Salamie and Christina M. Stansell