SUMITOMO BANK AIMS AT QUICK RECOVERY FROM MERGER
Sumitomo Bank Ltd <SUMI.T> is certain to
lose its status as Japan's most profitable bank as a result of
its merger with the Heiwa Sogo Bank, financial analysts said.
    Osaka-based Sumitomo, with desposits of around 23.9
trillion yen, merged with Heiwa Sogo, a small, struggling bank
with an estimated 1.29 billion dlrs in unrecoverable loans, in
October.
    But despite the link-up, Sumitomo President Koh Komatsu
told Reuters he is confident his bank can quickly regain its
position.
    "We'll be back in position in first place within three
years," Komatsu said in an interview.
    He said that while the merger will initially reduce
Sumitomo's profitability and efficiency, it will vastly expand
Sumitomo's branch network in the Tokyo metropolitan area where
it has been relatively weak.
    But financial analysts are divided on whether and how
quickly the gamble will pay off.
    Some said Sumitomo may have paid too much for Heiwa Sogo in
view of the smaller bank's large debts. Others argue the merger
was more cost effective than creating a comparable branch
network from scratch.
    The analysts agreed the bank was aggressive. It has
expanded overseas, entered the lucrative securities business
and geared up for domestic competition, but they questioned the
wisdom of some of those moves.
    "They've made bold moves to put everything in place. Now
it's largely out of their hands," said Kleinwort Benson Ltd
financial analyst Simon Smithson.
    Among Sumitomo's problems are limits placed on its move to
enter U.S. Securities business by taking a share in American
investment bank Goldman, Sachs and Co.
    Sumitomo last August agreed to pay 500 mln dlrs for a 12.5
pct limited partnership in the bank, but for the time being at
least, the Federal Reserve Board has forbidden them to exchange
personnel, or increase the business they do with each other.
    "The tie-up is widely looked on as a lame duck because the
Fed was stricter than Sumitomo expected," said one analyst.
    But Komatsu said the move will pay off in time.
    "U.S. Regulations will change in the near future and if so,
we can do various things. We only have to wait two or three
years, not until the 21st century," Komatsu said.
    Komatsu is also willing to be patient about possible routes
into the securities business at home.
    Article 65 of the Securities and Exchange Act, Japan's
version of the U.S. Glass-Steagall Act, separates commercial
from investment banking.
    But the walls between the two are crumbling and Komatsu
said he hopes further deregulation will create new
opportunities.
    "We need to find new business chances," Komatsu said. "In some
cases these will be securities related, in some cases trust
bank related. That's the kind of deregulation we want."
    Until such changes occur, Sumitomo will focus on such
domestic securities business as profitable government bond
dealing and strengthening relations with Meiko Securities Co
Ltd, in which it holds a five pct share, Komatsu said.
    He said Sumitomo is cautiously optimistic about entering
the securities business here through its Swiss universal bank
subsidiary, Banca del Gottardo.
     The Finance Ministry is expected to grant licences to
securities subsidiaries of U.S. Commercial banks soon,
following a similar decision for subsidiaries of European
universal banks in which the parent holds a less than 50 pct.
    But Komatsu is reluctant to push hard for a similar
decision on a Gottardo subsidiary.
    "We don't want to make waves. We expect this will be allowed
in two or three years," he said.
    Like other city banks, Sumitomo is also pushing to expand
lending to individuals and small and medium businesses to
replace disappearing demand from big business, he added.
    The analysts said Sumitomo will have to devote a lot of
time to digesting its most recent initiatives, including the
merger with ailing Heiwa Sogo.
    "It's (Sumitomo) been bold in its strategies," said
Kleinwort's Smithson.
    "After that, it's a question of absorbing and juggling
around. It will be the next decade before we see if the
strategy is right or wrong."
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