Sovereign discloses 5.11% stake in UFJ

Sovereign Asset Management, a reclusive Monaco-based investment group, has emerged as the largest single shareholder in UFJ, one of Japan's four largest banks, with a 5.11 per cent stake worth Y49.6bn ($415m) in the struggling and debt-ridden lender.

UFJ and Sovereign insisted that the investment was a long-term vote of confidence in UFJ, but Sovereign's recent investment history in South Korea and UFJ's uncertain future raise significant questions about the venture.

The investment company made extremely vocal demands that SK Corp improve its corporate governance and threatened legal action if its demands were not met, shaking up South Korea's corporate hierarchy.

The prospect of a foreign investment fund publicly criticising UFJ's management would be applauded by many foreign investors, but would trigger an array of problems within Japan's banking industry.

Sovereign said it had no plans to mimic tactics it employed in South Korea and was a long-term investor in UFJ. The company said the average length of Sovereign's investments was four years.

Analysts, however, were more sceptical about Sovereign's motives, pointing out that an investment fund is charged with generating returns and that it had acquired UFJ shares at historic lows.

There are considerable risks associated with an equity stake in a Japanese bank. For example, Resona, another struggling bank, recently received an injection of public funds and there are ongoing discussions by financial regulators to clear the way for further injections into the banks.

UFJ has started to take action to address its financial problems, but is considered one of Japan's weakest banks alongside Mizuho.

Any injection of public funds or nationalisation could result in shareholders' equity being written down to zero. Based on its non-performing loans, UFJ could be a prime candidate for a capital injection.