Cross-shareholdings biting further into corporate profits

February 7, 2009
By Ken Worsley

Back in June 2007, we reported that cross-shareholdings had increased in fiscal 2006 for the first time since FY1990. Although the 2006 figure (11.2% of shares) was still much lower than the 1990 figure (32.9%), the increase in cross-shareholdings was newsworthy, as the trend toward unwinding cross-shareholdings seemed to be motivated in part by fears of hostile takeovers.

At the time, the Nikkei reported that the new breed of cross-shareholding was different than what had been seen in the past, by stressing that “unlike in the past, when cross-shareholdings were often aimless arrangements, they are now being used to highlight business partnerships.” As a result, much of the growth in cross-shareholdings was seen amongst manufacturing firms rather than financial institutions.

Now, that increase in cross-shareholdings is having an effect on balance sheets. Not only are products not moving in domestic or export markets, but the strong yen and lowered stock prices have have combined to further batter profits. According to the Nikkei, Japan’s electronics manufacturers are looking at losses somewhere in the range of 1.95 trillion yen for FY2008, while automakers stand to lose about 415 billion yen.

Losses exacerbated by low stock prices is hardly limited to manufacturing firms, however. Consider this excerpt from an article from today’s Nikkei entitled Stock Losses Blotting Out Japanese Banks’ Moment In Sun:

The six major banking groups posted a 89% drop in combined net profit for the April-December period, according to results released through Friday. The stock market downswing since last fall is the biggest contributing factor, with the six groups writing down the value of shareholdings by more than 1 trillion yen combined.

How did the banks get in this position? The Nikkei offers this:

Based on the lessons learned at that time, the banks cut their shareholdings from roughly 27 trillion yen in fiscal 2001 to about half that figure in fiscal 2006. But the rate of decline has slowed since then because, according to Nikko Citigroup Ltd. analyst Hironari Nozaki, “bank executives lost their sense of urgency when stock prices recovered.”

In other words, risk management dozed off, if not went out the window. As a result, banks are finding it increasingly difficult to keep up with the demand for credit. Although lending grew by about 9 trillion yen in the last quarter of 2008, there remains the risk that further growth cannot happen unless banks are able to find some way to cut costs or increase their capital bases.

Filed Under Banking, Business, Equity Markets