UPDATE 3-Shinsei draws flak, eyes funding after Aozora deal flop

* Lenders cite changes in business environment for move

* Shinsei posts 140 bln yen full-yr loss; 2nd loss in 2 yrs

* May raise as much as 100 bln yen capital, replace
president

* Banking min: govt should strengthen guidance for Shinsei

* Shinsei shares down 4.5 pct, Aozora off 5 pct
(Recasts with earnings, analyst comments, background)

By Noriyuki Hirata and Taiga Uranaka

TOKYO, May 14 (BestGrowthStock) – Shinsei Bank (8303.T: ) and Aozora
Bank (8304.T: ) cancelled a planned merger that would have
created Japan’s No.6 bank by assets and the former also posted
losses for a second straight year, prompting Japan’s banking
minister to call for a bigger government role in the lender.

Shinsei, about one-third owned by U.S. buyout firm JC
Flowers and 24 percent owned by the government, also said it
may raise as much as 100 billion yen in new capital and that it
was replacing its president, while forecasting a profit in the
current financial year that lagged market estimates.
While the ending of the planned merger was expected, the
comments by outspoken Banking Minister Shizuka Kamei helped
push down Shinsei’s shares by more than 4 percent on investor
concerns about government intervention.

“I don’t know what Mr. Kamei really meant, but investors
might have feared that the government would tie Shinsei’s hands
even though Shinsei has been trying to deal with its problems
bit by bit,” said Kazutaka Ohshima, chief executive at Rakuten
Investment Management.

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Shinsei said on Friday it expects a net profit of 12.5
billion yen ($135 million) for the year ending in March 2011,
after posting a combined $3 billion in losses over the past two
years.

The forecast was below a mean estimate of 25.5 billion yen
in a survey of four analysts by Thomson Reuters I/B/E/S.

The lender also said it was replacing President Masamoto
Yashiro with Shigeki Toma, a director from Isuzu Motors
(7202.T: ).

Shinsei said it would focus more on the retail business
than investment banking and indicated it was looking to beef up
its capital this year.

“We would like to raise capital during this financial year,
though the amount will not be that big,” Yashiro told a news
conference, adding it would be less than 100 billion yen.

FAT PAYCHECKS

For the year ended March 31, Shinsei posted a net loss of
140.1 billion yen, a second straight year in the red after
setting aside additional provisions for consumer loans and
property-related businesses.

Kamei criticized the foreign-funded bank for its losses and
its pay levels for executives.

“If you look at executive pay, paychecks at foreign banks
are so much fatter. And on top of that, even though (Shinsei)
has been in the red to that extent for two years running, we
still have this situation (on paychecks),” the minister told a
news conference.

“Public money has been poured into this bank, and it’s
natural that the government give more supervisory guidance. I
think that the government needs to give more guidance while
respecting the bank’s autonomy,” he said.

Shinsei has not yet fully paid back public bailout money it
received following Japan’s banking crisis in the 1990s.

“Shinsei needs to raise capital. It also has to reduce risk
appetite and stick to a policy to go as a commercial bank,”
said Ehsan Syed, director at Fitch Ratings.

“It may be possible for the bank to do so as new management
is expected.”

The two banks said they had cancelled their merger plans
after considering changes in the business environment since
they announced merger plans in July last year.

Aozora, majority owned by private equity firm Cerberus
Capital Management [CBS.UL], also said it may consider entering
into a new business alliance with Shinsei.

JC Flowers partnered with private equity firm Ripplewood to
buy the failed Long-Term Credit Bank of Japan in 2000 for $1.2
billion at the height of Japan’s economic downturn and banking
crisis.

They renamed the bank Shinsei, meaning “new life”, and took
it public in 2004.

The deal, which was later recounted in the book “Saving the
Sun”, earned its initial backers more than several times their
initial investments and became known as one of the most
profitable buyouts in history.

Shinsei shares were down 4.5 percent at 106 yen,
underperforming a 0.7 percent fall in the benchmark Nikkei
average (.N225: ). Aozora shares fell 5 percent to 114 yen.

Stock Research

($1=92.75 Yen)
(Additional reporting by Sachi Izumi and Nobuhiro Kubo;
Writing by Edwina Gibbs; Editing by Muralikumar Anantharaman)

UPDATE 3-Shinsei draws flak, eyes funding after Aozora deal flop