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Daiwa’s U.S. Departure Orderly, But Future In Japan Is Cloudy

February 2, 1996

TOKYO (AP) _ For Daiwa Bank, this is the day of reckoning: it must cease its U.S. operations today as punishment for covering up huge bond-trading losses.

Daiwa’s ouster _ one of the harshest punishments ever meted out by U.S. regulators _ is ignominious, but orderly, and the takeover of its American operations by Sumitomo Bank has proceeded smoothly.

Back home in Japan, however, the bank’s future is cloudier. While there has been speculation that a merger with Sumitomo is imminent, analysts say many obstacles remain before the union to create the world’s largest bank can happen.

For one, analysts say that Daiwa, Japan’s 10th-largest commercial bank, has too much at stake for any quick deals to go through.

The bank is currently facing criminal charges in the United States as part of a 24-count federal indictment, which alleges its conspired with a rogue trader, Toshihide Iguchi, to hide $1.1 billion in trading losses from U.S. bank regulators.

The shutdown of its U.S. operations was imposed as punishment for failing to immediately report Iguchi’s losses to authorities.

Analysts said before going ahead with a merger, both sides would want to await the outcome of the criminal trial, which could result in heavy fines for Daiwa.

Size is another factor that may hamper such a union.

While Sumitomo, already the world’s fourth largest bank with $596 billion in assets, bought Daiwa’s U.S. units for $3.3 billion in January, it may not be inclined to also take on its much-larger Japanese operations, said Jim McGinnis, an analyst at Schroder Securities.

``It’s not 100 percent sure it’s going to occur here,″ McGinnis said in Tokyo. ``It’s two different issues. There’s the U.S. issue. There’s the Japanese issue.″

In the United States, Daiwa employed about 400 workers and had commercial bank branches in 15 cities, including Atlanta, Boston, Chicago and San Francisco. Daiwa has 207 branches in Japan.

In addition, Sumitomo and Daiwa have different styles of banking. Sumitomo has a reputation for aggressiveness, in contrast to Daiwa’s more low-key approach.

The secretive decision-making process at Japanese banks makes merger efforts very difficult to track.

Neither Daiwa nor Sumitomo would comment on the status of their reported efforts to merge.

Adding to the complications is the Finance Ministry, which could take action to speed up a merger should Daiwa get into serious trouble, said Ju-ichi Yamanaka, an economist at NLI Research Institute in Tokyo.

But the Finance Ministry itself is also under fire for its handling of the Daiwa affair. American regulators openly rebuked their Japanese counterparts for not being more forthcoming about Daiwa’s losses.

Such secretiveness, as well as Japanese banks’ intimate ties with the ministry, were harshly criticized in the United States when Daiwa’s handling of the trading losses came to light.

Daiwa had to reach a quick decision on its American operations, as it had no hopes of regaining credibility in the United States. But the public tends to be more forgiving in Japan, especially when some time has gone by.

Analysts say that stalling could have benefits here for Daiwa.

Other cultural factors are likely to come into play:

_The Daiwa employees’ union could pressure management to reject a merger. Sumitomo and Daiwa have been longtime rivals in Osaka, Japan’s No. 2 city 250 miles west of Tokyo where both banks are based.

_Japan’s lifelong employment tradition, which frowns on firings even after mergers, would make it difficult to reduce Daiwa’s bloated domestic operations. The inability to cut costs, especially in the Osaka area, where Daiwa and Sumitomo’s businesses overlap heavily, is a major strike against a merger.

``Daiwa has to first become more attractive to Sumitomo,″ said Yukiko Ohara, an analyst at UBS Securities, who believes a merger is unlikely until late 1997.

Like most other Japanese banks, Daiwa is also struggling with a huge bad-loan debt left over from the wild speculative lending of the late 1980s and early 1990s.

Problem loans at Daiwa climbed 21 percent to 341 billion yen ($3.2 billion) during the six months for fiscal 1995 ending Sept. 30.

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