STAYING IN THE GAME
CFO Rahul Gupta is putting finance in the lead of Shinsei Bank’s survival strategy.
By Tom Leander

Like many Japanese financial institutions, Shinsei has a serene, elegant executive floor and meeting rooms with tasteful prints on walls lit with sunshine. Stand there for a few minutes, however, and the serenity vanishes. Shinsei may have inherited this regal headquarters from Long Term Credit Bank (LTCB) of Japan—Shinsei’s name in an earlier, less frenetic era—but its team of Japanese and foreign executives manages it in a no-frills style. Hardly anything looks replaced since 2000, when the busted LTCB was snapped up by two U.S. private equity firms in a ground-breaking bailout arranged by the Japanese government, which launched Shinsei, whose name means ‘rebirth.’

The staff has the intensity of a Wall Street investment bank and the look of a United Nations delegation that happens to be based in Japan. Its lead shareholder is J. Christopher Flowers, a U.S. investment banking legend and one of the original buyers who never cashed out. CEO Thierry Porte, a former Morgan Stanley banker, hails from France. CFO Rahul Gupta is a seasoned Indian banker who spent years directing finance at DBS in Singapore.

Gupta conveys urbane energy when he enters a room. Immaculately tailored, his one concession to Wall Street is the occasional power shirt—blue torso with white collar. Halfway through a sentence about reforming the role of the global CFO, he upends his Starbucks coffee. No matter—he gets tissues and cleans it, and then announces, “We need more sunlight,” and fiddles with controls until the metal curtains glide toward the ceiling, revealing a splendid view of Tokyo.

Gupta has already begun talking about the future of the CFO. “CFOs have not used their full potential in modern companies,” he says. “We have to unlock what they can do. I see it in sporting terms: is the CFO a midfielder or a goalkeeper? Obviously, the CFO must be in charge of goal-keeping, but only as midfielder will he or she begin to create value.”

Whatever the position, it’s important to stay in the game, and there’s some question whether Shinsei will be able to do so. The bank, the great hope for Japanese banking under its new owners and new strategy, has been hit by double misfortunes—a falloff in its core consumer banking business following a change in Japanese regulations and subprime exposure that led to write-offs. It is under severe pressure from the Japanese government—to which Shinsei still owes money from its LTCB days—to maintain its profitability targets. In mid-March, the bank announced the sale of its headquarters to maintain its profit goals in what looked like an emergency move.

Some analysts were not impressed. “The bank is in trouble in both strategy and corporate governance,” says Shinichi Ina, a banking analyst with Credit Suisse in Tokyo. Ina says the bank faces threats to its three main businesses. The current interest rate environment has stalled Shinsei’s early gains in retail banking. The consumer finance outlook is grim. And bankers in the institutional group are fleeing amid the subprime damage. Ina says company morale was hurt by the headquarters sale. (Gupta says the sale “will provide us an opportunity to reorganize and relocate our operations to a more efficient location to better meet the needs of our customers.”)

Many believe that Shinsei has the acumen to tackle these misfortunes in the short run, but wonder whether it is big enough to weather a long-term downturn. Throughout the decade, Shinsei has offered a new way to bank in Japan. It boasted strong capitalization, better risk management, superior IT, and an ability to crack down on bad loans. But despite several successful acquisitions, particularly of consumer finance companies, it never reached the size that would make its greater productivity and economies of scale pay off. Shinsei remains stuck in the doubtful mid-tier of Japanese banks, a sector that, analysts predict, will undergo consolidation if a long-term downturn ensues.

Hence Gupta’s urgency. He argues that Shinsei’s approach needs time to bring the robust results expected by shareholders, and that the CFO’s job now is to provide a deeper drive for capital efficiency and productivity through better application of finance. He paints a picture of finance department empowerment that would appeal to those who see the role of finance as central to business strategy. The bank’s current troubles have only accelerated his efforts.

“The best chance for success comes when finance is directly connected to the value proposition of the company,” he says.

The Stuff of Legend

Shinsei has always had a heroic tale to tell. The private equity groups that purchased LTCB in 2000 were Ripplewood and J. C. Flowers, two hard-driving firms that believed by bringing more transparent practices to Japan Shinsei would be more competitive, and, theoretically, more profitable. The bank was criticized as ‘un-Japanese’ from the start, but it made inroads in consumer and commercial finance and retail banking.

The new owners, Flowers and Timothy Collins of Ripplewood, installed a Wall Street style management team. The bank boasted superior IT infrastructure and a ‘customer-friendly’ model that differed from the large, traditional Japanese banks. It leveraged its strong capital base and risk management skills to offer new products to consumer banking customers at competitive pricing. It also bought several consumer finance companies.

Most important, the management cleaned Shinsei’s books of bad loans and cut off bad borrowers—a move that shocked the Japanese banking community. It branched into retail banking, competing directly with Japanese giants Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group. Despite its lack of scale, Shinsei proved a nimble competitor and the retail operation handed it a cheap source of funding. By 2006, the retail business was contributing half of the bank’s 274 billion yen in revenues.

All of this worked—for a while. Despite the critics and rising competition, Shinsei’s profits grew fast, and in 2004, it launched one of the most spectacular IPOs in Japan’s history. The stock leapt 58 percent on the day of the offering, landing a market capitalization of more than US$10 billion.

Then, Shinsei was hit by an unforeseen risk that has proved a stubborn ‘long tail’ event. The Japanese government cracked down on aggressive consumer lending, but did so in a way that all practitioners—honest or otherwise—found themselves in the middle of an aggrieved business. In 2006, the Japanese government passed laws cutting maximum interest rates on consumer loans from 29.2 percent to a maximum of 20 percent and limiting the amount that individuals can borrow. Following write-offs, Shinsei took a loss for the fiscal year ended in March 2007, compared to 76 billion in yen in profit the year before.

In the summer of 2007, Shinsei unexpectedly took a US$107 million write-off for its subprime exposure. Pressure began mounting from the Japanese government. In 1998, the government had bailed out many of Japan’s banks. Most have paid back the loans, but Shinsei still owes US$1.88 billion, hence its burden of intensified FSA supervision.

Under FSA rules, if a bank that owes the government money undershoots its earnings projections by 30 percent or more, it must file a business plan with the FSA. Shinsei missed one FSA target last year. The unwritten rule, according to analysts, is that missing a target twice consecutively puts sitting management in jeopardy.

The headquarters sale may have given Shinsei’s embattled managers a temporary reprieve, allowing them to fight for another day. But it’s a non-recurring gain. Shinsei will have to act quickly.

The Chief of Performance

If Flowers and Porte were looking for a CFO to tackle changing the bank from within, Gupta is suited to the task. At DBS Bank in Singapore, Gupta was a managing director and group financial controller. He had also worked at Deutsche Bank, HSBC India, and Société Générale in India. He studied in Mumbai and Delhi, and grew up in Mumbai.

He joined Shinsei in September 2005, after initial meetings with Porte, who had just started as CEO, Masamoto Yashiro, who had been CEO since 2000, and Flowers. Soon after joining, Gupta produced a single A-3 sheet of paper with 10 points on the priorities of bank finance department restructuring typed on it. The brief included tactical priorities such as bolstering Shinsei’s capital, some operational ideas and a strategic priority—changing the role of the CFO into ‘chief performance officer.’

Whatever they thought of the theories, they liked the look of Gupta. Flowers says that, “Rahul and the finance team play a key role as we work towards Shinsei’s objectives.” Gupta emerged on day one of the job with a mandate to change finance at the bank.

Shinsei already had a tradition of looking at problems differently for a Japanese company, investing in IT for performance management and approaching compensation in new ways. Gupta is seeking to harness this to tie the company’s business as closely as possible to growing economic capital. Under this thinking, every employee in the company should be connected to shareholder value. The question, as it has been for banks that have tried to do this before, is how to make it a system rather than a slogan—and provide traceable results.

“Say an organization has a share price of 50 yen and wants to get to 100 yen,” says Gupta. “You can break down the earnings per share into institutional, consumer, and retail businesses. You can further break it down by credit, trading, and capital markets segments. You are either a product manager or a customer relationship manager. You should be able to determine how each one will be able to reach 100 yen. It’s not rocket science, but how many organizations can claim that clarity?”

Gupta aims, in a way that may be unprecedented in banking, to make the finance department the conduit of this effort. The first step was to build a process, harnessing IT, sophisticated enough to produce the ‘clean’ data needed to make the change. The key task here was to define the general account ledger responsibility of each key employee—fixing a direct connection between an individual’s work and the balance sheet in a way that could be measured. Gupta was ready for a second stage by last summer, and this involved the wholesale transformation of the finance department.

Under the plan, Gupta is separating the finance department into three pillars. The first pillar comprises stakeholder partners who work directly with business heads and might even locate to where the business heads operate. The finance leaders here are expected to understand a particular business and work with operating managers to develop strategy. The second pillar is dubbed ‘central finance,’ and its job is to examine regulatory and compliance trends and seek strategies that help the business. This group centralizes compliance initiatives, rather than having them scattered throughout the company, and can advise on how tax or regulation would affect an M&A bid. A third pillar, the center of excellence, produces the company’s accounts.

It is the first pillar that has the broadest potential to help Shinsei. “Here,” says Gupta, “finance acts to add value to the businesses.” In the world of banking, adding value in this way can prove a complex task. In one instance, providing advice to bankers on how to create value in credit trading, three elements come into play. These include gauging the impact of currencies, working out transfer pricing on a particular instrument, and arriving at activity-based costing assumptions (activity-based costing is used to identify and assign costs to operations).

Experience helps, particularly in the area of activity-based costing. “How do I say how much of a given set of costs goes through residential mortgages?” says Gupta. “The key is to keep it simple.” The final goal is to give finance the means to isolate the risk-adjusted return on capital by product and by customer throughout the company. Having done this, it should be possible to focus on businesses that give the best return, adjust others for better return, and exit the losers. In a dynamic market such as consumer banking, this could provide a powerful advantage. The metrics will also help management apply compensation more efficiently, aligning rewards for performance to increases in shareholder value.

The reorganizing of finance began six months ago. Gupta expects to see the first impact in the fiscal year that begins this month. Shinsei will begin tying the new value-based metrics to compensation by 2009.

Saving Shinsei

Will any of this save Shinsei? If all else holds steady, perhaps. Shinsei has a history of making new systems work and of driving the value-creating ethos down into the organization. In this sense, Gupta’s initiative is in the well-established style of the bank—he is simply driving it further.

The question is whether Shinsei is running out of time. Analysts worry that the economic downturn related to the global banking crisis may put pressure on Japan’s mid-size banks, particularly Shinsei and the two other financial institutions that are partially foreign-owned, Aozora and Tokyo Star Bank. All are grappling with subprime-related provisions, and none have the scale to compete, as yet, against the three giants. Consolidation or a foreign purchase might be in the cards. In November, rumors flew in the Japanese financial press that JPMorgan was eyeing a bid for Shinsei or Aozora, but withdrew.

Certainly, Shinsei holds promise to investors. J. C. Flowers announced a two-part investment in the bank in November, bringing the private equity firm’s stake to 33 percent by February, at which time J. C. Flowers surpassed the stake retained by the Japanese government as part of the LTCB bailout. Flowers has been one of the primary builders of Shinsei from the beginning, and became famous as a private equity investor as a result.

It may be pride that is keeping him tenacious. Or it may be his persistent belief that banking as usual in Japan is destined for the shelf, and that smart, shareholder-value based management will prevail. Investors appear to think so. As Flowers finalized his share purchase at the end of January, Shinsei’s stock rose on a day of a general market rout of other bank stocks.

The sale of the headquarters, allowing Shinsei to meet the FSA’s targets, does ensure that Shinsei’s senior management—including Porte and Gupta—won’t be replaced and will be able to carry their revitalization program forward. Some of the bank’s strategists believe that the confusion in the consumer finance market following the sudden regulatory change may play in Shinsei’s favor.

“Opportunities certainly will emerge,” says a source in the bank who didn’t want to be identified. “There’s a huge opportunity to take advantage of the mess.” Part of the reason that banks are exiting the business is that the confusion continues. Under certain circumstances, some borrowers who accepted 29.2 percent rates in the past will be able to make a legal claim to be reimbursed. The whole market, according to current parlance, is still in a legal ‘grey area.’

Shinsei and Flowers, however, are still committed to consumer banking, grey area or not. To build profits in this embattled sector will require a discipline and productivity not common among Japanese banks—and not yet fully achieved by Shinsei. That’s where Gupta comes in. If Shinsei is reborn again, finance will play a central role in its survival and success. The timing may be tight, but from Gupta’s point of view, there’s plenty of game left to play.

Tom Leander is editor-in-chief of CFO ASIA