Leading consumer finance players in Japan (March 2006)Promise, which boasts a
market share of around 13 percent, is looking to acquire all the
shares of Sanyo Shinpan, which has around 4 percent of the market
(see below). On 31 July, Promise acquired Asahi
Enterprise, the largest shareholder in Sanyo Shinpan with a 25.2
percent stake; the president of Sanyo Shinpan, who holds 19 percent
of the company, has already agreed to tender his shares.

Both Promise and Sanyo Shinpan argue that in response to the
severe business environment, a merger is the best way forward.
Hiroki Jinnai, president of Promise, said in a briefing on 3
August: “We must pursue economies of scale ahead of the upcoming
shift in the market. Sanyo Shinpan is an ideal partner for Promise…
the acquisition is an opportunity for Sanyo Shinpan shareholders to
maximise profits.”

The combined company will have ¥2 trillion ($17 billion) in
consumer loans outstanding and 3.72 million customers (2.73
inherited from Promise). The new group will benefit from Sanyo
Shinpan’s mature loan guarantee business, which boasts 168 alliance
partners and ¥151 billion in guaranteed loans outstanding, compared
with ten alliance partners and ¥188 billion in loans outstanding
from Promise.

Jinnai stressed that, with Sanyo Shinpan being focused primarily in
the west of Japan, there was minimal overlap between the two groups
and the number of duplicate loans was negligible. The two will look
to find up to ¥8 billion in synergy costs, mainly from integrating
marketing, branches, IT functions and customer service

In the first quarter of fiscal 2007, Sanyo Shinpan added ¥38.7
billion to its allowance for loan losses and ¥45.4 billion to its
allowance for losses due to interest refunds, a total of ¥84
billion. “This gives Sanyo Shinpan a higher reserve ratio
associated with losses due to interest refunds than any other major
Japanese consumer finance company, including Promise, improving the
combined group’s financial soundness,” added Jinnai.

The troubles in the consumer finance market stem from the Japanese
government’s controversial limits on consumer lending, set to come
into force at the end of 2009, as well as substantial credit
refunds (see RBI 565). The new law caps the amount of
interest that can be charged on consumer loans at 20 percent for
loans of less than ¥100,000, 18 percent for loans of less than ¥1
million and 15 percent for loans of ¥1 million or more. It also
regulates the total lending amount, in practice, to one-third of a
customer’s annual income. Acom, the third-largest player in the
market, has said that its aim is to earn at least ¥50 billion of
consolidated operating profit on the assumption that the average
loan yield of unsecured loans will be 16 percent.

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The plan for Promise, stressed Jinnai, was to establish a
competitive business model that would be less susceptible to the
changing environment and look to achieve sustainable earnings
growth. However, he warned the Japanese market will remain tough:
“We foresee even more challenging environments ahead. We firmly
believe this integration is vital.”

Mitsubishi UFJ Financial Group (MUFG), Mizuho and Sumitomo Mitsui
Financial Group (SMFG), Japan’s three biggest banking groups, all
reported sharp falls in income for fiscal year 2006. MUFG reported
a 25.5 percent drop in annual profit to ¥881 billion; Mizuho’s fell
28.9 percent, while SMFG’s decreased by 35.7 percent. The results
mirror similar profit falls at Japan’s consumer finance companies:
Aiful registered a net loss of ¥411 billion and rival Acom, in
which MUFG has a 15 percent stake, reported a loss of ¥437

In a sign of the ongoing market difficulty, GE Consumer Finance,
one the major players in the market, has revealed that it may look
to sell its Japanese arm. The unit has some ¥800 billion in loans