(Bloomberg) — For years, Nobuhiro Doi resisted calls for Japanese banks to end the long-standing practice of holding shares in their corporate clients. Now the 68-year-old president of Kyoto Financial Group Inc. is beginning to come around to the idea.
“We cannot completely ignore increasingly demanding views toward strategic holdings,” Doi said in an interview at the bank’s headquarters in the ancient capital. He is also becoming more open to mergers, though he has no plans in place now.
With about ¥1 trillion ($7 billion) in cross-shareholdings, Kyoto Financial has been a symbol of Japan’s old guard holding out against selling the stakes, given its historic ties to exporters based in the city including Nintendo Co., Nidec Corp. and Kyocera Corp. While Doi still wants to keep investments in the technology giants, he said holdings in others are now subject to review for potential sale.
“We will examine the justification for holding the shares with tougher standards,” he said, referring both to companies based in Kyoto and elsewhere. “Some have lost meaning for us to keep.”
Japan’s financial institutions have faced mounting pressure from authorities and investors to pare their cross-shareholdings, which are seen as an impediment to good corporate governance. In November, Kyoto Financial unveiled a target to cut at least ¥100 billion of such stakes by March 2029, a goal that Doi acknowledges doesn’t satisfy everyone.
“It might be better if we could give numbers like ¥200 billion or ¥300 billion. But we actually wanted to keep holding shares,” he said.
Kyoto Financial has long argued that retaining stakes in the likes of Nintendo is preferable because they generate healthy returns for the bank. While the value of its cross-holdings may have fallen in the recent market rout, the ¥1 trillion it held as of September exceeded the lender’s current market capitalization of ¥610 billion.
Doi has borne the brunt of investors’ demands for bolder action. At last year’s annual shareholder meeting, US proxy advisory firm Institutional Shareholder Services recommended voting against him because of the bank’s hefty holdings in client shares. His approval rating was at 75%, but other board members were elected with far higher votes.
Other shareholders have taken a more nuanced stance. Kyoto Financial attracted attention when Silchester International Investors called for special dividends in 2022 and 2023. Silchester said at the time that the bank should only sell its cross-shareholdings if it used all the proceeds to buy back shares, noting the significant loss of dividend income and capital gains taxes from any sale. Both proposals were voted down.
Silchester recently increased its stake in Kyoto Financial to 8.5%, a regulatory filing shows.
Doi declined to elaborate on specific communication with Silchester. “Some of their views are incompatible to us, but we have learned various things from them including about shareholder returns,” he said.
He said some overseas institutional investors have urged the bank not to sell such shares at all.
Doi’s thinking is also evolving on another contentious topic in Japan’s regional banking industry: consolidation.
He now won’t rule out the possibility of merging with other local banks — a prospect he used to view as unthinkable. Behind his changing attitude is Japan’s rapidly aging population, which means the number of customers will shrink in Kyoto as well as neighboring areas.
“There are various ways to survive and I now think a merger is one of the options,” Doi said, while stressing that the bank has no such intentions at the moment.
Meanwhile, Doi said the bank is likely to reduce its ¥2.4 trillion market portfolio in the fiscal year that started this month. The total is likely to drop to around ¥2 trillion toward March 2029, mainly by not reinvesting in Japanese government bonds when they come up for redemption.
The current market turmoil triggered by the Trump administration’s tariff policies is one reason for being cautious on new bets, Doi said. But a more structural factor is that the bank is seeing lending grow faster than deposits, he said.
For years, Kyoto and other Japanese banks suffered tepid loan demand while deposit money piled up, prompting them to manage surplus cash by investing it in their market portfolios. But that’s changing as the gap between deposits and loans narrows.
Those dynamics have emerged as Japan’s economy recovers from decades of deflation, though it faces fresh uncertainty stemming from the US trade policies.
“Give our low loan-to-deposit ratio, we used to have a large securities portfolio,” Doi said. “Now we’re correcting that.”
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