Investing in a Stronger Japanese Banking System

Theme: Clients

Goldman Sachs invests US$1.27 billion (JPY150 billion) in Sumitomo Mitsui Financial Group (SMFG) in 2003 and assists SMFG with the disposition of some of its non-performing assets.

In early 2003, Goldman Sachs and Sumitomo Mitsui Financial Group (SMFG) entered into a series of transactions that provided the latter with needed capital to shore up its balance sheet and strengthened longstanding cooperative business efforts between the two firms. A key part of the agreement was Goldman Sachs’ investment of JPY150.3 billion (approximately US$1.27 billion) in preferred stock of SMFG and convertible after two years into a 7% stake in the Japanese bank.

The transactions occurred at a time when Japanese banks struggled to regain their footing in the aftermath of the Asian financial crisis of the late 1990s. Sumitomo in particular faced challenges, including the threat of nationalization due to rule changes in Japan, making the deal with Goldman Sachs even more important. A major focus of the Goldman Sachs-SMFG agreement was the disposition of some of SMFG’s non-performing assets. Like those of most other Japanese banks at the time, these mainly consisted of troubled real estate and construction loans.

Goldman Sachs already had significant experience in the Japanese market. Over the previous four years, the firm had purchased just under US$10 billion in distressed debt and real estate in the country. In October 2003, Goldman Sachs agreed to buy a further US$9.1 billion in nonperforming loans out of Sumitomo’s portfolio while setting up a joint venture to repackage the debt and help troubled borrowers become more profitable. Goldman Sachs’ infusion of both capital and expertise into SMFG’s restructuring efforts helped SMFG begin to rehabilitate its balance sheet and return to profitability.

The investment deepened a long-standing relationship between the two firms that dated back to Sumitomo Bank’s US$500 million investment in the Goldman Sachs partnership at a critical juncture for the firm in 1986. It also underscored Goldman Sachs’ commitment to Japan and to the Japanese financial markets at a time when capital and restructuring expertise was critically needed to stabilize and strengthen the country’s banking sector amid increased regulatory scrutiny.