Will Shinsei bank finally rake in more profits after acquiring GE's Lake unit?

Shinsei Bank, the Japanese lender part-owned by private equity investor Christopher Flowers, agreed to buy General Electric's local finance business for 580 billion yen ($5.4 billion), boosting its lending to consumers in the country by almost two-thirds.

Shinsei will buy GE's Tokyo-based Lake unit and its mortgage-loan and credit-card businesses, the bank said in a statement on July 11. The deal will add 779 billion yen to Shinsei's balance of outstanding loans to individuals in Japan, which stood at 1.2 trillion yen as of March 31, the company said.

Chief Executive Officer Thierry Porte is investing in an industry that has been in decline since a 2006 crackdown on consumer lenders' interest rates by Japan's government and courts. GE's CEO Jeffrey Immelt, trying to revive shares after announcing a surprise first-quarter profit drop in April, is disposing of as much as $100 billion of financial assets.

“The acquisition will result in a higher market share of the consumer finance business for Shinsei Bank, but concentration risk relating to this industry may rise,” Standard & Poor's said in a statement.

Shinsei fell three percent to close at 358 yen in Tokyo trading before the announcement, after people familiar with the negotiations said the Tokyo-based bank and GE were in final talks. The company, down 25 percent in the past 12 months, failed to meet a government-mandated profit goal in the year ended March 31 and posted a loss the previous year.

GE's Profit
Fairfield, Connecticut-based GE posted a 3.9 percent drop in second-quarter profit on July 11, matching analysts' estimates on a per-share basis. Profit from continuing operations was $5.39 billion, compared with $5.61 billion a year earlier.

Shinsei's acquisition is the biggest by a Japanese financial firm this year, according to data compiled by Bloomberg. The lender didn't hire any investment bank to advise on the transaction, CEO Porte said at a press briefing in Tokyo.

Shinsei will acquire a lending business with 2,000 employees, 2.2 million customers and 1,138 branches, the statement said.

“We are acquiring a high-quality portfolio with a great management team,” Porte, 51, said. “Shinsei is uniquely positioned to be a game-changer in this industry.”

Industry Woes
Japan's consumer lending industry has been contracting since the government approved legislation in 2006 capping the interest rates consumer lenders can charge at 20 percent, down from 29 percent previously.

The nation's four biggest consumer finance companies posted losses totaling 1.7 trillion yen in the year ended March 2007 after making provisions for potential refund claims by borrowers who paid excessive fees and interest.

“The consumer lenders' revenues have been falling,” said Junichi Shimizu, a Tokyo-based research analyst at Deutsche Bank AG. “The pressure may continue for a couple of years.”

As part of the deal announced, Shinsei will take on a maximum liability of 206 billion yen for potential refunds to GE's borrowers in Japan, according to the Japanese bank.

Three of Japan's four biggest consumer lenders have sold convertible bonds this year to raise capital. Promise Co., the second-largest by market value, fell the most in six years on July 9 after scaling back a convertible bond sale by 30 percent, citing “unstable” markets.

Funding Concerns
Aiful Corporation, Japan's biggest consumer lender by assets, plunged 11 percent on June 25 after Lehman Brothers Holdings said in a report the lender's parent may be insolvent. Aiful denied it has funding difficulties and later said it may sue Lehman.

Shinsei's existing consumer-finance units Shinki and Aplus returned to profit in the year ended March 31 after both posted losses the previous year.

Since the beginning of 2008, GE has agreed to sell its corporate charge card unit to American Express for $1.1 billion. It agreed to swap GE Money units in Germany and the U.K. to Spain's Banco Santander in exchange for Italian commercial lender Interbanca SpA, which is valued at 1 billion euros ($1.58 billion). GE last year sold U.S. subprime unit WMC Mortgage and put its Japanese consumer business on the block.

The company said it plans to spin off its entire GE Consumer & Industrial group to shareholders, two months after putting its century-old appliance unit up for sale.

In May, GE said it may divest its Australian home mortgage unit Wizard as loan growth in the country slowed after four interest-rate increases since August.

GE has done business in Japan since 1886, when it provided electric generators to a government printing factory. It entered the local consumer finance market by acquiring Minebea Shinpan in 1994. The unit bought Lake's personal loan business four years later.

Aside from government-imposed interest rates, what could be other reasons why Shinsei and other Japanese banks had incurred losses for the past months?