Mitsubishi UFJ Financial Group, Japan's biggest bank, said on Monday it will raise up to $10.6 billion by issuing new shares, the latest sign that a free-falling stock market is likely to shred profits at Japanese lenders.
News of Mitsubishi UFJ's fundraising came as Tokyo stocks tumbled to their lowest in 26 years, prompting Japan's government to outline steps to ease the strain on banks, which have heavy exposure to domestic equities.
Although Japanese banks have had little exposure to the risky credit instruments that crippled Wall Street, investors now fear that lenders' extensive shareholdings and rising bad-loan costs will unravel their profits this year.
"The government will have to do something for banks," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"The problem here is that the stock market has fallen. It has nothing to do with derivatives or anything like that. As stocks have dropped, banks are faced with rising paper losses."
Investors have dumped Mitsubishi UFJ Financial Group (8306.T) and other major Japanese banks in recent sessions, on concern that their heavy exposure to domestic equities could trigger the kind of massive losses that tore through Wall Street but have so far skirted Japan.
Prime Minister Taro Aso said the government would expand a scheme that gives banks access to public funds and also strengthen regulation on the short-selling of shares.
Aso has also said a state body should be used to buy shares from banks, and that limits on bank recapitalizations should be raised, Economics Minister Kaoru Yosano told reporters.
The prime minister also called for extending tax relief on income from stocks and dividends, Yosano said.
The measures underscore the difficulties now facing lenders in the world's No.2 economy, which at first appeared to have avoided the credit crisis, allowing them to invest in overseas rivals.
Tokyo's Nikkei share average briefly dropped as low as 7,141 on Monday, its lowest since 1982.
The benchmark has lost about half of its value so far this year — falling by nearly a third this month alone — as a rise in the yen and a weakening outlook for the economy has curbed appetite for Japanese stocks.
The losses, which drove more risk-averse investors away from currencies such as Australian dollar and back into the yen, overshadowed Group of Seven warnings on Monday that the yen's sharp swings posed a threat to financial and economic stability.
TRADITIONAL JAPAN
Mitsubishi UFJ said in statements filed with the Tokyo Stock Exchange that it planned to raise up to 990 billion yen ($10.6 billion), with up to 600 billion of that in common stock and 390 billion in preferred shares.
The preferred shares will not be convertible to common stock, MUFG said.
The terms of the common stock issuance have yet to be determined, as do the recipients of the preferred shares, the bank said.
Traditionally, Japanese lenders hold large stakes in their corporate clients as a means to cement business ties. The value of those stocks totaled more than $250 billion at the end of March, data from the Japan Bankers Association shows.
Small, local banks, which are also tied to Japan's dwindling regional economies have also been hit hard. In response, the government recently announced a plan to make up to 2 trillion yen ($21.3 billion) in public funds available to the country's lenders.
Economics Minister Yosano went as far to say that on Sunday that the scheme should be increased to around 10 trillion yen ($106 billion).
Aso is also planning to announce an economic stimulus package later this week to support the economy.
That package, Japan's second in just a few months, is expected to include a total of 5 trillion yen ($54 billion) in new spending, including 2 trillion yen in temporary income tax cuts.
CAPITAL RAISING
Mitsubishi UFJ rivals Mizuho Financial Group, Japan's second-largest bank, and third-ranked Sumitomo Mitsui Financial Group, are both looking to raise as much as 500 billion yen ($5.4 billion), newspapers reported on Monday.
Both lenders said in statements that they had made no decisions regarding their capital plans.
MUFG, which recently invested $9 billion in U.S. investment bank Morgan Stanley, has also this year paid $3.5 billion to take full control of California lender UnionBanCal Corp and spent about 150 billion yen to raise its stake in consumer finance affiliate Acom.
Shares of Japan's top three banks fell by their maximum limit allowed on the Tokyo Stock Exchange.
Mitsubishi UFJ finished down 14.6 percent, to 583 yen. Mizuho tumbled 14.8 percent to 230,000 yen while Sumitomo Mitsui dropped 11.5 percent.
The Nikkei closed 6.4 percent down, hitting its lowest closing level since October 1982.
