Sanwa Vaults to No. 1 in World ... For Now

Like a long-running game of musical chairs, Japanese banks last year reshuffled their places in a preliminary ranking by the American Banker of the world's top 200 banking companies, based on asset size.

Sanwa Bank Ltd. climbed to No. 1 from No. 5, Fuji Bank Ltd. moved from being the world biggest bank to the third biggest, and Sumitomo Bank Ltd. moved from No. 3 to No. 4.

But the top position will soon go to Bank of Tokyo and Mitsubishi Bank Ltd., slated to merge next April to form a behemoth institution with nearly $735 billion in assets.

The single non-Japanese bank to make it into the top 10 was Germany's Deutsche Bank, which clocked in at No. 10, with $368 billion of assets.

Anlysts estimated that most of the growth at Sanwa came from an aggressive expansion in lending to rapidly growing Asian countries.

But if Japanese banks consistently seem to believe that bigger is better, analysts say they have their doubts about this strategy.

"They may be the biggest in terms of assets, but they fall well below American and European banks in terms of profitability," said Gary Kleiman, a Washington D.C.-based international banking consultant.

Analysts noted that problems at Japanese banks have increased along with their assets, which have grown by tens of billions of dollars over the last few years.

"The strength of Japanese banks used to be that they had large amounts of so-called hidden capital or equity in Japanese companies whose stock prices went through the roof, and the fact that their lending was largely secured by land," said Andre Cappon, president of the CBM Group, a New York-based financial consulting firm.

"But land values are dropping spectacularly in Japan, and the stock market hasn't done too well either, so banks have had their assumptions completely shaken up."

Analysts noted that the problems confronting Japanese banks, mainly large real estate lending that went sour after the Japanese economy went into a slowdown, are very similar to those faced by U.S. banks in the early 1990s.

But they say Japanese banks have, by and large, been either unable or unwilling to come to grips with the problems, preferring to reschedule loans rather than write them off the books and take large hits to capital.

"Part of the strategy behind the recent combination (of Bank of Tokyo and Mitsubishi Bank) is to do something to increase the profitability of the two banks and set some precedent for the industry by focusing on cost cutting as well as solvency, liquidity, and return on capital," said Mr. Kleiman. "But it's been a very slow process, and I don't know how much dramatic change there will be for these banks."

Both analysts observed that in a society where bankers have traditionally taken their cues from the government, political uncertainty and infighting is hampering banks' ability to come to grips with problems.

"Much of the confusion is linked to the weakness in the Japanese government and a failure to take more forceful action to address problems," Mr. Kleiman said. "So the most we can look at is some sort of incremental improvement in their situation."

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