NEWS ANALYSIS: Japan Deal Likely To Create Biggest Foreign-Owned Bank

The planned merger of Bank of Tokyo with Mitsubishi Bank is likely to create the biggest foreign-owned bank in the United States, with $90 billion of assets and powerful presences in California retail banking and wholesale banking nationwide.

The deal, announced Tuesday, will probably lead to formation of a U.S. subsidiary more than twice as large as that of the Netherlands' ABN Amro Holding, which has some $42 billion of U.S. assets.

The unit would be slightly larger than the eighth-ranking U.S. bank, Banc One Corp., of Columbus, Ohio, which has $89 billion of assets.

Analysts say the strongest impact of the merger will come in California, where the retail operations of $16.7 billion-asset Union Bank, a unit of Bank of Tokyo, and $7.7 billion-asset Bank of California, a unit of Mitsubishi, will total over $24 billion.

That's just behind California's third-ranking bank, First Interstate Bancorp, which has $25 billion of California assets out of a total $55 billion. (See related story on back page.)

Officials at both Japanese-owned California units would not discuss the merger, apart from saying they would be monitoring negotiations in Tokyo.

However, analysts said the units are likely to be merged and should be able to achieve substantial cost savings by combining back offices and eliminating duplicate positions.

This, together with a bigger branch network, would give the combined entity a strong competitive advantage in California, where both banks are seeking to strengthen their relations with midsize companies.

"Putting those two banks together in California is going to mean something," said Andre Cappon, a New York consultant that advises foreign banks in the United States. "Japanese banks have historically not been terribly profitable, but this gives them a real chance to rationalize costs, extend their coverage, and build a profitable retail banking franchise."

Both Union Bank and Bank of California were badly hit by the downturn in California real estate in the early 1990s, but have since bounced back. Bank of California had net profits of $219 million last year, up from $60.3 million a year earlier. Earnings at Union Bank fell 9.4% to $75.3 million, mainly as a result of heavy writeoffs.

Analysts also predict the merger, scheduled to occur in April 1996, will help the two banks expand operations in Latin America, where Bank of Tokyo is already active. Bank of Tokyo recently obtained a banking license in Mexico.

"This is not only going to consolidate the two banks' position in California, but will also translate into increased activity in emerging markets in Latin America and Southeast Asia," said Gary Kleiman, president of Washington-based Kleiman International Consultants. "They're probably going to use California as a bridge to expanding further south."

Joseph Mauriello, a partner in KPMG Peat Marwick's international banking and finance group, agreed. "Large U.S. banks will face increased competition, particularly in emerging markets abroad, as a direct result of the proposed merger," he said.

Mr. Kleiman predicted that both banks will soon clean up their remaining problem loans in California. Although Union Bank wrote off most of its problem loans last year, Bank of California's nonperforming assets still equal 4% of $7.7 billion in total assets, while Union Bank's are now down to $177 million, or 1.06% of total assets, after $559 million in writedowns last year.

However, analysts said they are skeptical about how much of an impact the merger will have on the two bank's U.S. wholesale banking operations, most of which have centered around taking loan participations in syndications organized by big U.S. banks.

"I don't see how this is going to improve their problems with low-tier corporate relationships and narrow product range," said Mr. Cappon.

Said Stephen Brecher, also from KPMG Peat Marwick: "They have an opportunity to get operational cost and funding efficiency, but the real question is whether they can really become market makers rather than just participants."

Raphael Soifer, of Brown Brothers Harriman, noted that "Both banks already have very large lending limits. Moving from participations and dealing room assets to building the kind of infrastructure needed to compete with Chemical (Banking Corp.) and other big banks would be a major step, but they have not yet said whether they intend to make that kind of investment."

Although Bank of California is nationally chartered by the Office of the Comptroller of the Currency and Union Bank has a California state banking license, regulators in California said they saw nothing in principle that would bar a merger of the two banking units.

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