Sumitomo Mitsui Financial Group, Japan's third-largest bank, said it expects a full-year net loss of $3.9 billion and will sell shares to raise up to $8 billion, after being hit by losses on stock holdings and a deepening recession.
The sale brings the total capital raising by Japan's three largest banks, hurt by declines in their massive stock portfolios, to up to $33 billion.
The annual loss is Sumitomo Mitsui's first in six years and raises concerns about the outlook for rivals Mitsubishi UFJ Financial Group and Mizuho Financial Group, both of which are more sensitive to share prices.
The benchmark Nikkei share average fell 35 percent in the financial year to March 31.
"It was somewhat of a surprise. We were expecting a profit revision from Sumitomo Mitsui but we certainly were not expecting a loss," said Ismael Pili, a bank analyst at Macquarie Securities in Tokyo.
"If it's this bad for SMFG, we have to wonder what's in store for Mizuho and MUFG given that they have higher break-even levels on their equity holdings," said Pili, referring to the level where a bank begins to record paper losses on its stock holdings.
The latest fundraising could also fuel speculation that Sumitomo Mitsui could make a stronger bid for Citigroup's Japanese brokerage arm, Nikko Cordial Securities.
Bids for the unit, Nikko Cordial Securities, are due by the middle of this month, Reuters reported last week.
Sumitomo Mitsui blamed investment losses and higher bad-loan costs for the turnaround from its previous estimate for a net profit of 180 billion yen ($1.8 billion) for the year to March 31. The consensus among 14 analysts polled by Reuters Estimates had been for a 116.7 billion yen profit.
Sumitomo Mitsui will cut its annual dividend by a quarter to 90 yen. The bank said it expected to book a 53.2 billion yen loss on its 2 percent stake in Britian's Barclays, its largest single equity loss.
Costs related to bad loans will likely came to 750 billion yen in the year to March 31, the bank said, as Japan suffers its worst recession since World War Two.
"It's incredibly unfortunate, but we are forced into a loss for the year due to the dramatic economic downturn," said Sumitomo Mitsui Director Takeshi Kunibe.
Kunibe said by issuing new shares the bank would be able to boost its capital and better compete as a "global player".
The new issue could dilute Sumitomo Mitsui's existing shares by up to 30 percent, he said. The bank had previously said it would not dilute shareholder value by issuing common shares.
The bank said it aims to raise its Tier 1, or core capital ratio, to nearly 8 percent, from 7.08 percent last September.
The new shares would likely be attractive as long as they were priced to cover the impact of dilution, said Takeshi Osawa, a senior fund manager at Norinchukin Zenkyoren Asset Management.
Sumitomo Mitsui raised about 700 billion yen earlier this year through issuing non-dilutive preferred securities.
Analysts have said for months that more fundraising would be necessary by Japan's three megabanks, but Sumitomo Mitsui was seen as the healthiest among them and the one likely to manage a profit in the year to March 31.
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It has estimated that it would break even on its large shareholdings with the Nikkei 225 Average at 7,500. The Nikkei ended at 8,916.06 on Thursday.
Japan's banks held 25.6 trillion yen worth of shares at the end of March 2008, the Japanese Bankers Association said.
During the year to the end of March 2009, the Nikkei average lost 35 percent, implying a loss of nearly 9 trillion yen for the nation's banks. Daiwa Securities SMBC, a division of Daiwa Securities Group, and Goldman Sachs will lead manage the public offering, SMFG said.