Money Masters From the East

By Gordon M. Henry

Dai-Ichi Kangyo. The name does not have the same familiar ring as Toyota, Honda, Sony or Nikon. But Tokyo-based Dai-Ichi Kangyo is a global business enterprise that has, in a sense, become more powerful than all those other Japanese companies combined. According to figures released last week by the American Banker newspaper, Dai-Ichi Kangyo, whose assets reached $207 billion in the first quarter, has just surpassed New York's Citicorp ($176 billion) as the largest banking company in the world.

Dai-Ichi Kangyo is just one of a group of Japanese banks that have become the new behemoths of finance. In fact, the American Banker ranking showed that four of the top five banking companies are now Japanese firms. The others: Fuji Bank ($143 billion at the end of last year), Sumitomo Bank ($136 billion) and Mitsubishi Bank ($133 billion). All told, Japan had five of the top ten banking concerns and 13 of the largest 25. In 1980 none of the Japanese banks were in the top five, and only Dai-Ichi Kangyo ranked among the first ten.

Last year Japan's banks overtook their U.S. counterparts as the world's largest international lenders, with $650 billion in loans outstanding, compared with $600 billion for American institutions. As the Japanese banks have seen their assets balloon, partly because of the rapid appreciation of the yen against the dollar, they have become more ambitious, aggressive and resourceful. The Japanese have bought up banks in the U.S. and Australia, financed iron-ore mining in Brazil and provided funding for the underwater Chunnel, which will link England and France. Taking their cue from Japanese manufacturers, banks like Dai-Ichi Kangyo have penetrated foreign markets partly by charging less for loans than their competitors do.

The coffers of Japanese banks have become swollen because of their country's huge trade surplus, which this year is expected to reach a record $56 billion. The banks have no way of investing all that money domestically. Moreover, they are eagerly expanding abroad because they have more freedom from government regulation on foreign shores than at home. Partly for that reason, they have invested about 25% of their assets overseas.

The U.S. is now host to 38 Japanese banks, concentrated in New York and California. The California Street area of San Francisco, where Sumitomo, Mitsubishi, Mitsui Manufacturers and Bank of Tokyo Trust have offices, seems to be almost an extension of the Tokyo financial district. Moreover, the invaders are swallowing their competitors. San Francisco's Golden State Sanwa Bank will soon buy the California subsidiary of Britain's Lloyd's Bank for $263 million. When that happens, the Japanese will control four of the ten biggest banks in California.

The U.S. is becoming hooked on the inflow of money from such lenders. Japanese banks buy some 25% of all U.S. Treasury bonds. Says one European banker: "They are the ones who are funding the U.S. budget deficit." Ironically, Michigan, where the auto industry has been battered by Japanese imports, was saved from a budget crisis in 1982 when the Mitsubishi Bank agreed to guarantee $500 million worth of the state's bonds. Almost no project is too large or too small for the yen-laden financiers. Last year the Bank of Tokyo lent $5 million to a group of New York developers who were building an office complex in a run-down section of the Bronx.

Determined that the sun should never set on their empires, the Japanese banks have also expanded in Western Europe. They are particularly conspicuous in London, where some 35 Japanese banks operate. These institutions account for more than 20% of all British banking assets. Says Jacques Girault, director of international service for Paris-based Credit Lyonnais: "The Japanese have already shown they can be aggressive, even virulent."

One reason that the Japanese have descended on London is its importance as a center of the burgeoning Eurobond business. In this market, international lenders can underwrite bonds that are denominated in foreign currencies and free from virtually any government restrictions. In 1980, when they were still neophytes, Japanese banks handled about $1.5 billion in Eurobonds, putting them behind the banks of three countries plus the World Bank and the European Community. Midway into 1986, the Japanese are in second place, behind U.S. banks, with $12.6 billion in new issues.

It is no wonder that the Japanese have a yen for the deregulated Euromarket. Since the U.S. Occupation after World War II, Japan has had one of the world's most tightly regulated financial systems. To prevent the concentration of capital in a few hands, the Japanese put into their banking law a word-for-word translation of the American Glass-Steagall Act, which prohibits banks from underwriting corporate securities. In addition, the Japanese have restrictive rules on the interest rates that banks can pay depositors. Says Nobuya Hagura, president of Dai-Ichi Kangyo: "The regulations are outdated, and they inhibit business performance."

Nobody should know better than Hagura. As the expansion-minded head of Dai- Ichi Kangyo, he oversees a vast network of offices from Chicago to Caracas and Madrid to Melbourne. Dai-Ichi Kangyo tries to portray itself as a friendly institution. Its slogan: "The Bank with a Heart." Like most major Japanese banking concerns, it belongs to a keiretsu, an industrial group made up of dozens of interconnected companies. The bank owns stock in the companies and extends them much of the credit they need. The Dai-Ichi Kangyo keiretsu includes such well-known firms as Hitachi, Isuzu and Kawasaki. As part of his duties, Hagura meets once a month with the heads of client companies to discuss, among other things, ways of increasing foreign business.

One such strategy, for Japanese bankers as well as manufacturers, may be to lose money in the short run in order to gain market share for the future. Some Japanese banks offer loans to U.S. businesses at between 1/8% and 1/4% below the going rate at American banks. Says David Lough, a chief executive with London-based National Westminster Bank: "The Japanese take a very long-term view of markets. They are quite prepared to loss-lead in the early stages." But Japanese bankers shrug off the criticism. Says Hagura: "You always get accused of undercutting when you're expanding."

One of the main lines of business for Tokyo bankers is the financing of overseas ventures by Japanese multinationals. When Nissan built its Smyrna, Tenn., plant in 1983, the Industrial Bank of Japan arranged a $600 million deal. The complex package called for the bank to underwrite bonds issued by Rutherford County, which enabled the county to build the plant and lease it to Nissan. Often a Japanese bank will pack its bags the same day a fellow keiretsu member ventures abroad.

Critics contend that the Japanese banks are comparatively unprofitable and therefore vulnerable to financial trouble. Sumitomo Bank, for example, returns a mere 30 cents on each $100 of assets. In comparison, Citicorp earns 75 cents and Morgan Guaranty $1.35. But Japanese bankers say that such skimpy earnings are the norm in Japan. Explains Yoshiteru Murakami, international managing director at Dai-Ichi Kangyo: "The Japanese economy as a whole is a low-profit operation. The shareholders do not demand as high a return as those of other countries."

U.S. and European bankers are girding themselves for increasingly formidable competition from Japan. One report issued by Nomura, a top Japanese securities firm, predicts that by 1995 the country will have $1 trillion in loans outstanding. In California, some U.S. moneymen speculate that a Japanese bank might take over beleaguered BankAmerica, the second largest U.S. banking company, after Citicorp. If that happens, a name like Dai-Ichi Kangyo could soon be as famous as Sony or Toyota.

With reporting by Edwin M. Reingold/Tokyo and Frederick Ungeheuer/New York