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LEADS with 5 grafs to RECAST lead, raise size of combined bank and competitors, ADD

March 29, 1995

LEADS with 5 grafs to RECAST lead, raise size of combined bank and competitors, ADD comparative reference to biggest U.S. bank and to merger not threatening U.S. financial institutions. Picks up 4th pvs, ``This is...; trims last two grafs.

TOKYO (AP) _ The merger of two prestigious banks to form the world’s largest bank was welcomed today by Japan’s Finance Ministry, opening the way for further consolidations in the country’s ailing financial industry.

The presidents of Mitsubishi Bank and the Bank of Tokyo, smiling broadly, met with Finance Minister Masayoshi Takemura this morning to formally report their intention to merge their institutions. Takemura told reporters later that he welcomed the plan.

If the merger goes through, the new bank would have deposits of $589 billion and total assets of $814 billion, more than three times the size of the largest U.S. bank, Citicorp, which has about $250 billion in assets.

Japan’s Sumitomo Bank is currently the leader in assets with $601 billion. Japan’s Sakura Bank, itself the product of a 1990 merger between Mitsui and Taiyo Kobe banks, leads in deposits with $433 billion.

Despite its size, Japan’s new banking behomoth won’t threaten American banks’ monopoly over banking relationships with U.S. businesses and consumers.

But the proposed merger would create a tough new competitor for Japanese banks, which have stagnated in recent years under rules that compartmentalize the kinds of business they can do. Although among the world’s largest, they have been left behind by more aggressive and profitable competitors abroad in newer areas such as derivatives trading.

``This is an indication that the world is getting tougher and that Japanese financial institutions need to get tougher with it,″ said Walter Altherr, financial analyst at Merrill Lynch.

Specifics of the deal, including the amount of stock to be exchanged, have yet to be worked out. The new bank tentatively is to be named Tokyo Mitsubishi Bank.

Japanese banks now dominate the world top 10 in terms of assets and deposits thanks to decades of huge demand for funds to build up Japan’s industrial machine and interest rates on deposits kept artificially low by government regulations.

But the maturation of the Japanese economy has dried up the need for loans, and financial deregulation has driven interest rates higher and allowed banks to expand into new kinds of businesses, forcing Japanese banks to become more competitive, Altherr said.

Industry and media analysts welcomed news of the merger, noting that the strong domestic business of Mitsubishi dovetailed well with Bank of Tokyo’s heavy international presence. The bank presidents hope the merger, which had been rumored for years, will be finished by April 1996.

``With financial services being liberalized, such realignment in the banking industry is the road that must be traveled even at some costs,″ the national newspaper Asahi said in an editorial in today’s editions.

Standard and Poor’s credit rating service also came out in favor of the merger plan, but said it would watch for more specifics before issuing a final assessment of the new bank’s credit worthiness.

The stock market, which responded to news of the merger Tuesday with a giddy 585.48-point rise, fell back 221.00 points, or 1.32 percent, today to 16,460.73 as investors realized that initial expectations for the merger’s positive effects on the banking industry may have been too high.

In the long term, the merger is seen as good news for an ailing bank industry in dire need of streamlining and modernization. But in the short term, it is more likely to increase the gap between healthy banks like Mitsubishi and Tokyo and banks still suffering under mountains of bad debt left over from the bubble era of easy credit and stock and real estate speculation in the late 1980s.

While other Japanese banks with a greater bad debt burden may not be able to perform similar mergers any time soon, they now have even more incentive to clean up their balance sheets and expand into global capital markets, said Morgan Stanley analyst Betsy Daniels.

The two banks are among the most highly respected financial institutions in the country.

Mitsubishi Bank is at the center of the Mitsubishi ``zaibatsu″ group of companies, whose sprawling reach includes a top trading company, an automaker and the Nikon camera company. The Bank of Tokyo has been an international powerhouse since the days when it was the only bank in Japan allowed to deal in foreign exchange.

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