Japanese banks backed by more than $6 billion in spare cash are in talks to buy assets from European banks, sources familiar with the discussions said, as euro zone leaders try to coax foreign capital to help overcome the bloc's debt crisis.
While all eyes have been trained on Chinese institutions as potential buyers, cashed-up Japanese banks are emerging as the more likely suitors to pan for golden assets in the debt mess.
Sources familiar with the discussions said most talks are exploratory and few specific deals are on the table. Japanese bankers feel they can bide their time anyway since the euro zone's stress means it is a buyers' market.
"Japanese banks have been approached (by European banks) for asset sales but they don't have to hurry," Yoshinobu Yamada, senior analyst at Deutsche Securities in Tokyo, said.
"They can wait. The more they wait, they can get cheaper and better deals. The next year could be a year for an offense for Japanese banks," he said.
The share prices of many European banks have been decimated by the global credit crunch and now the euro zone debt crisis. Many are down between 60 percent and 80 percent.
The risk of a 50 percent write down in Greek government debt as part of measures to try to resolve the debt crisis and tougher regulations that demand higher capital requirements are further threats to their balance sheets.
Research by Deutsche Bank estimates that European and U.S. lenders are ready to sell about $2.1 trillion of non-core assets, with about $1.3 trillion of that likely to be sold by European banks.
Most of these assets are project finance and property loan portfolios. Japanese institutions are mostly interested in scooping up leasing businesses and other loan portfolios, the sources said.
"There are some Japanese banks jostling to buy portfolios of assets," said a senior Asia-based investment banker, who was not authorized to speak about the matter publicly.
Japan's top three lenders -- Mitsubishi UFJ Financial Group <8306.T>, Mizuho Financial Group <8411.T> and Sumitomo Mitsui Financial Group <8316.T> -- have the cash to splurge on overseas deals.
These mega banks have about $6.2 billion in excess capital, CLSA estimates, with capital ratios comfortably sitting in the range of 15-16 percent.
The question is whether they will make a swift move or drag their feet. Japanese bank executives suggest it may be the latter.
"We are excited at the opportunity. But we can wait, maybe a year, to get what we really want," a top Japanese bank executive told Reuters.
A third source said Japanese banks are also circling distressed banking assets and some discussions are underway, although the source declined to give specifics.
"There is a lot of Japanese interest for sure," said the source, who has been involved in discussions about potential acquisition targets in Europe. "They are looking at a pretty broad range of assets."
Japanese banks' desire to invest overseas is driven in part by shrinking loan growth at home.
Bank lending fell from a year earlier for 22 straight months to September, Bank of Japan data shows. The decline stopped in October, but major banks continued to see a drop, the BOJ said.
Loan demand related to the country's reconstruction effort following the March 11 earthquake and tsunami has not yet materialized.
Another motivation for Japanese banks is that they would be buying from a position of currency strength. The yen has hit successive record highs against the dollar this year and has rallied 17 percent against the euro since April.
This is not be the first time that Japanese banks have made bold overseas bets.
In the aftermath of the 2008 financial crisis, Mitsubishi UFJ Financial, Japan's largest lender, bought a 21 percent stake in Morgan Stanley for $9 billion.
Nomura Holdings <8604.T> scooped up the Asian and European operations of bankrupt Lehman Brothers, the Wall Street titan whose collapse in 2008 sparked the global financial tsunami.
Last year, Bank of Tokyo-Mitsubishi paid 3.98 billion pounds($6.1 billion) for a portfolio of project finance loans from Royal Bank of Scotland , the sort of deal Japanese banks are looking at now.
"Japan's mega banks will be attracted to any Asian assets being sold by exiting European banks," said Brian Waterhouse, an analyst with CLSA.
Waterhouse doubted Japan banks would want to make purchases in Europe. Asia would be a more strategic target, he said.
More broadly, Japanese corporations have been aggressively bidding for overseas assets off the back of the yen's strength.
Japanese companies have made overseas acquisitions worth $54.7 billion so far this year, compared with $38.3 billion in 2010, Thomson Reuters data shows.
Waterhouse said it was logical for Japanese banks to use a firm yen and strong capital position to buy into Asia.
"But they will be cautious in what they pay," Waterhouse said.
Japanese banks have a checkered history in acquisitions. At times they have been opportunistic, rather than making decisions backed by a planned strategy.
"The thing is Japanese banks have a poor track record for overseas operations," Deutsche's Yamada said.
($1=0.63 British Pounds, 78.03 yen, 0.73 euros)
(Additional reporting by Stephen Aldred Michael Flaherty and)