Under new ownership, will Shinsei Bank be able to draw a line under its debt legacy?

Shinsei Bank’s fresh start under the aegis of SBI Holdings Inc. marks a turning point for its efforts to draw a line under the financial crisis that drove it into insolvency more than 20 years ago.

As the successor to failed Long-Term Credit Bank of Japan (LTCB), Shinsei Bank is the only bank in the nation that has yet to finish repaying public funds it received during the crisis, which followed the collapse of a speculation-driven bubble economy in the early 1990s.

But whether the bank’s restart Tuesday as a subsidiary of SBI, an online financial service provider, can reap synergies and help it resolve the long-standing issue remains uncertain.

“To what degree do you think that (public fund) repayment is feasible? Don’t you have lukewarm thinking?” one shareholder asked Shinsei Bank management at an extraordinary shareholders’ meeting Tuesday.

“We don’t believe repayment is impossible,” replied outgoing President Hideyuki Kudo. Incoming President Katsuya Kawashima merely said, “It’s important to improve the bank’s profitability and raise its corporate value.”

LTCB was a prestigious bank that supported Japan’s rapid economic growth after World War II. Its bankruptcy and life under temporary state control in 1998 was symbolic of the post-bubble financial crisis, along with collapses the preceding year of Yamaichi Securities Co. and Hokkaido Takushoku Bank

In 2000, LTCB made a fresh start with its current name under the wing of a U.S. investment fund. Since returning to the first section of the Tokyo Stock Exchange in 2004, however, Shinsei Bank’s stock price has remained weak and a clear prospect of fully repaying taxpayers’ money has yet to emerge.

In exchange for the public funds, the government acquired preferred shares in Shinsei Bank.

Subsequent conversion of the preferred shares into common shares by 2008 made it harder for the bank to repay the funds. For the bank to repay the public funds by buying back the common shares owned by the government, its stock price would have to rise to around ¥7,500 per share — more than three times current market levels — because all shareholders, including the government, have to be treated equally.

SBI President Yoshitaka Kitao is considering the option of taking Shinsei Bank private, by purchasing shares in the bank that are held by those other than SBI and the state and then buying the government’s holdings. But it’s hard to predict whether the plan will be feasible.

The government-affiliated Deposit Insurance Corp. (DIC) of Japan holds over 20% of Shinsei Bank’s shares, together with a subsidiary, Resolution and Collection Corp.

“I hope the bank will create a business model that will help improve its corporate value and lead to the repayment of public funds,” said Hidenori Mitsui, governor of DIC.

The road Shinsei Bank must take to put the financial crisis behind it will be tough going, with the lender facing the challenge of boosting its earnings capacity amid a challenging business environment of prolonged low interest rates and intensified competition, from contenders that include those outside the banking industry.