Japan’s Supreme Court has approved the unification negotiations of two of the country’s key banking units, despite opposition from a third party, thereby paving the way for the world's largest bank.
According to the verdict, the unification of UFJ Holdings Inc and Mitsubishi Tokyo Financial Group Inc (MTFG) will create the largest bank of the world, with 1.7 trillion active dollars.
The ruling also comes as a blow to Sumitomo Mitsui Financial Group (SMFG), which is seeking to take over UFJ for itself.
Sumitomo initially filed suit against UFJ claiming the unilateral cancellation of the May trust unit sale by UFJ was a breach of contract.
The High Court allowed UFJ to withdraw from a deal, reversing Sumitomo’s July 16 injunction and clearing the way for a full takeover of UFJ by Mitsubishi, one of the towering financial groups in Japan. Mitsubishi and UFJ will move forward with comprehensive integration talks in light of Monday's ruling that removed potential obstacles to negotiations.
Both groups’ holding companies, as well as commercial bank, trust bank and brokerage operations, will be integrated and MTFG President Nobuo Kuroyanagi is slated to become the president of Mitsubishi UFJ Holdings Inc. UFJ Holdings President Ryosuke Tamakoshi has been tapped as the prospective company’s chairman.
Mitsubishi hopes to gain UFJ's retail client base and its prize corporate customers, such as Toyota, through the merger. The two financial groups have established a merger committee with the merger ratio to be set after the completion of due diligence.
Mergers among Japanese banks are an old tradition. The most recent unification that led to the establishment of Sumitomo Mitsui was the result of a merger of Sumitomo Bank and Sakura Bank in 1999. UFJ is also the product of a unification of three banks in 2001.
On the Supreme Court's ruling, Sumitomo stated that 'the temporary injunction has been struck down, but the exclusive negotiating rights with the UFJ group have not,' indicating that it would not give up its fight for UFJ. Following the ruling, SMFG issued details of a proposal to inject large sums of capital into UFJ in the form of preferred shares by the end of September.
Sumitomo Trust sank 1.8 percent after its suit to block the merger talks was rejected. Sumitomo Mitsui Financial, the parent of Sumitomo Trust, dropped 1.2 percent as its prospects for luring UFJ away from Mitsubishi Tokyo faded in the wake of the court decision.
With the merger widely expected, investors had already snapped up Mitsubishi Tokyo in earlier sessions and took profits Tuesday driving its share price down 1.2 percent. UFJ, the weakest of Japan’s four largest banking groups, ended up 1.3 percent.
Analysts have said that a merger will enable UFJ to write off its bad loans more quickly and could also prove a stabilizing force for Japan's overall financial system. The capital base of UFJ Bank is expected to sharply decline because of write-offs of loans extended to major borrowers. MTFG plans to provide capital assistance for UFJ.
Tokyo stocks fell Tuesday after disappointing industrial output data raised concerns that Japan's economy wasn't performing as well as investors had hoped. The U.S. dollar was down against the Japanese yen.
