The Japanese banking industry was holding extremely large debts after the breakdown of a bubble economy and faced the crisis of bankruptcy. In order to solve the inflammable financial crisis, Japanese government introduced financial reform two times. “Act for Implementation of Financial Holding Company” was enacted in 1997, and it allowed banks formed large financial groups by forming pure financial holding companies which comprised these subsidiary companies such as securities firms, trust banks, investment trust companies and banks together to meet the worldwide trend of the financial reform and M&A owing to globalization and liberalization.
However, forming financial group is not necessarily making profits, it depends on the ability of dealing with bad debts. Resona Financial holdings Inc. was nationalized for its mismanagement. UFJ financial holdings Inc. (UFJ) was also unable to deal with large bad debts and sought to merge with Mitsubishi-Tokyo financial group (MTFG) to solve the management crisis. MTFG longed for increasing the domestic and off-shore blanches to make more profits and catch up with American and European financial groups after solving bad debts problem and maintaining sound capital adequacy ratio. If MTFG could improve the circumstance of management of UFJ, it would enlarge the asset of the group and be expected to benefit from synergies.
This study adopted CAMEL ratings used by American Financial regulators and the method of financial statement analysis to estimate the financial conditions of MTFG and UFJ (including group, bank and trust bank) before and after they merge to observe the change of five components-Capital Adequacy (C), Asset Quality (A), Management Quality (M), Earnings (E) and Liquidity (L). Mizuho and Sumitomo-Mitsui financial group are acted as contrast to see the merger case bring the synergy for MUFG and UFJ or not. Four conclusions and discoveries have been reached as below.
1. The operation and profitability among Mitsubishi-UFJ financial group (MUFG) and its main bank subsidiaries evince consistent substantially.
2. It is conspicuous for the increase of capital adequacy ratio and the decrease of NPL ratio after they merge. MTFG is effective to solve the management problem of UFJ and brings the synergy.
3. In the early period of the merger, it is not conspicuous for the reduction of expense and cost. In addition, due to the avalanche increase of total asset, liquidity ratio is declined. In order to ensure the capital financing, it is necessary to maintain liquidity ratio.
4. It brings the synergy in profitability owing to the constantly increase of revenue after they merge and MUFG becomes the leader financial group in Japan. However, compared with American and European financial groups , it still has the difference in ROA and ROE and the lower profitability is a concern.