Goldman Sachs Group (NYSE:GS) agreed with Sumitomo Mitsui Financial Group to convert $1.09 billion in preferred shares it holds in the company, helping the company to raise much needed capital, as it trails its global rivals.
Measured by market value, Sumitomo Mitsui Financial Group is the second-largest bank in Japan. Chief Japanese banking competitor Mitsubishi UFJ Financial Group Inc. is also putting pressure on the bank to sell shares in order to raise capital.
With the Goldman shares being considered fully diluted by most investors, it’s not considered a bad move for them to convert them at this time, and shouldn’t have a negative impact on the shares of Sumitomo Mitsui Financial Group.
Along with Goldman Sachs, others helping to work out the common stock sale for Sumitomo Mitsui are Citigroup (NYSE:C) and Nikko Cordial Securities.
Goldman has had a long term relationship with Sumitomo Mitsui, and had acquired 150.3 billion yen of preferred shares in the company in 2003, which paid a dividend of 4.5 percent annually. In April of 2008, Goldman converted a third of the preferred shares to common stock. At that time it was a similar circumstance where Sumitomo Mitsui needed to increase their capital base as well, as stock investments and poorly performing loans cut into their cash.
Sumitomo Mitsui began working together with Goldman Sachs back in 1986 when they owned 12.5 percent of the company, which they long since have sold. I bet they wish they had held onto that after seeing the performance of Goldman since that time.
Sumitomo Mitsui is far from being the only Japanese bank in need of capital, as competitors Mitsubishi UFJ and Mizuho Financial Group have also been forced to raise capital, as over a little over a year they’ve sold $30 billion in common stock for that purpose.
Of the largest banks in the world, Japanese banks are considered to be among the worst in regard to balance sheets, obviously putting them at high risk in any economic conditions, but especially so in the ones we’re facing now.
Other means of raising capital for the large Japanese bank is through the redemption of subordinated debt, which will raise about $1 billion, another $2.45 billion in preferred securities, and $1.35 billion in subordinated bonds.
The core capital ratio continues to be low, as it stood at only 5.9 percent as of September 30, even after Sumitomo Mitsui raised a significant amount of capital in July 2009.
