The Tokai Bank, Limited

1877–1947

The Tokai Bank, Limited is one of the leading city banks in Japan. Based in Nagoya, it is the dominant bank in Japan's industrial region of Chubu, where Toyota, among other companies, is based. The product of a wartime amalgamation, Tokai offers retail, commercial, and investment banking services in its home market through 285 retail branches and more than 21 subsidiaries and affiliates. Active overseas throughout Asia and Oceania, the Americas, Europe, and the Middle East, Tokai is represented in 42 cities in 26 countries and regions, offering banking, securities, leasing, fund management, and trust services.

Tokai Bank was established in 1941, approximately six months before Japan entered World War II but in the midst of Japan's war with China. At that time the Japanese government was dominated by a military group which had ordered the concentration of several industries in an effort to increase economic efficiency. As part of that initiative, three small banks in Nagoya--the Aichi Bank, the Nagoya Bank, and the Ito Bank--were merged. Each had been in existence for many years. The oldest, the Aichi Bank, was founded in 1877 as the Eleventh National Bank.

The three banks were roughly equal in size. Because they all wanted to make a break with their troubled pasts as small local banks, they adopted a different name for the new bank: Tokai, Japanese for "East Sea." The East Sea, or Sea of Japan, was at the time a rich source of food and the main conduit between Japan and its colonies and conquests on the Asian mainland. Tokai Bank never got an opportunity to participate in any large wartime development projects, however, but instead was forced into defensive measures and spent much of the war issuing debt.

When the war ended in 1945, the occupation authority laid plans for the postwar banking industry and initiated purges of managers suspected of aiding the war effort. The Tokai Bank was deemed the appropriate size for a regional bank, and, because it had not contributed significantly to the war effort, was permitted to keep its management and to retain its name. In 1947 Tokai was awarded a foreign exchange license, greatly improving its clout. The following year, under the Reconstruction and Reorganization Act, it was permitted to increase its capitalization to ¥435 million--a substantial increase in size.

During the 1950s, Tokai was given de facto responsibility for aiding recovery in Chukyo prefecture. Because Japan's Ministry of International Trade and Industry had set broad and ambitious goals, the bank had a great deal of work to do. The completion of large plants required tremendous amounts of capital and long lead times that often exceeded the bank's capacity. Nagoya, however, grew steadily during this period and savings rates remained high. By the mid-1950s, as some of the bank's client projects came on line, margins were greatly improved.

Two years earlier, Tokai was itself forced to write off ¥70 billion (US$654 million) in loans.

1954–1968

Dedicated to offering the highest degree of service in a relatively unsophisticated market, Tokai inaugurated checking accounts in 1960. The bank had also developed a successful trust business. In 1962, however, Tokai became obligated under financial regulations to separate this business from its regular operations and in the process founded the Chuo Trust & Banking Company. Tokai began loan services in 1963, started the country's first online money-order system in 1965, and in 1968 opened a foreign trade information center, whose aim was to assist in marketing financial opportunities overseas.

Once it had successfully expanded its offices in Tokyo and Osaka, Tokai began to look overseas. The bank opened its first overseas branch, in London, in 1963, partially in an effort to assist Japanese export firms in European markets but mostly to gain representation in a major world capital. A New York office, established in 1954, was upgraded to a branch in 1965.

As Japan entered its second period of industrial growth in the mid-1960s, Tokai's location gained greater significance. Situated midway between Tokyo and Osaka, Nagoya had grown into a major industrial region, and Tokai was the only major bank with its head office there. It naturally had the strongest relationships with local government and businesses, and therefore became the most important economic intermediary in the region.

Tokai gained even greater significance in the early 1970s as domestic demand in basic industries began to show the first signs of saturation. Equally important were preparations for an ambitious export drive being made by leading manufacturers and trading companies. In order to maintain its position in the region, Tokai started to emphasize international expansion. Additional offices were opened in Los Angeles, Amsterdam, Hong Kong, Zurich, Sydney, and Singapore, while the foreign-trade information center was upgraded to include investment activities.

Tokai's most important customer during this period was undoubtedly the Toyota Motor Corporation, which became Tokai's largest shareholder. Toyota's tremendous sales, particularly in the United States, created numerous expansion opportunities for both the company and the bank. But, although both companies were closely associated with other firms, they fell short of creating an industrial group similar to the Dai-Ichi Kangyo, Sumitomo, or Mitsubishi groups. Tokai had cultivated important relationships with many companies associated with otherwise rival industrial groups, but it was simply not in its interest to become involved in such an industrial group.

1974–1988

Tokai pursued its expansion in international markets into the 1980s by opening a branch in Chicago and offices in Atlanta, Dallas, and Lexington, Kentucky, among other locations. As part of its expansion, Tokai established subsidiaries in North America, including Tokai Bank of California (1974), Tokai Trust Company of New York (1986), and Tokai Bank Canada (1987).

The trust operation in New York allowed Tokai to begin building its expertise in trust banking, an activity it was not chartered to perform in Japan. The liberalization of financial regulations in Japan, however, ensured that eventually institutions such as Tokai will be permitted to engage in trust banking, insurance, and securities underwriting.

Tokai undertook a reorganization in 1987 that resulted in the creation of a treasury and capital market group and a corporate planning group. These new groups were intended to enhance the bank's ability to manage information in bond and other securities markets and assist client corporations in developing sound business strategies. In 1988 three regional headquarters were established for the Americas, Europe and the Middle East, and Asia and Oceania.

While working to develop capabilities in a broader range of activities, Tokai in the late 1980s concentrated on consolidating its position with middle-market corporations, offering these companies services that were once available only to large corporations. As a result, the bank became exceedingly popular in that sector, which made up a growing share of Tokai's business.

In foreign markets, Tokai seized an opportunity to work with non-Japanese clients in such areas as leveraged buyouts, corporate restructuring, and large-scale real estate development projects. While these were higher-risk activities than Tokai had been accustomed to undertaking in Japan, they were also normally fee-based, and therefore somewhat more stable.

1989–1995

Tokai's expansion in the United States continued in the late 1980s, with this growth period broadening the services it offered there. In 1989 Tokai acquired the leasing firm Master Lease Corporation, which was renamed Tokai Financial Services, Inc. in 1991. Also in 1989 a securities firm, Tokai Securities, Inc., was established in the United States, and Tokai became the first foreign bank to sell commercial paper in the United States.

Back on the home front, Tokai reconfigured its retail banking network. Like other banks, it started to rely more heavily on automated teller machines (ATMs), which were more cost-effective than branches. Tokai increased the number of ATMs in its network from 349 in 1992 to 508 in 1995. During this same period, the bank combined branches in some areas so that the number of branches fell from 294 to 285.

The early 1990s were difficult years for all Japanese banks, as unsound lending practices of the late 1980s came back to haunt the banking industry at the same time that the Japanese economy entered into a prolonged recession. During this period, Tokai was involved both in rescuing other troubled banks and in cleaning up its own house. In 1992, Tokai and three other Japanese banks helped to bail out Taiheiyo Bank by granting it low-interest loans. In late 1995, Tokai took over operations of Osaka Shinyo Kumiai, a credit union that had compiled some US$1.5 billion in unrecoverable loans, out of the thrift's total loan portfolio of US$2.7 billion. Tokai only absorbed the credit union's deposits and recoverable loans, with the Japanese government taking on the bad loans. Two years earlier, Tokai was itself forced to write off ¥70 billion (US$654 million) in loans. The difficult times showed clearly in Tokai's declining asset base, which fell from ¥37.49 trillion in 1991 to ¥30.86 trillion in 1995.

With such difficulties at home, it is little wonder that Tokai sought to increase its presence overseas during this period. Asia became the region of highest interest both because of the rapidly growing economies there and because middle-market corporations in Japan--Tokai's prime customers--were increasingly looking overseas for expansion and usually targeting Asia first. In 1993 alone, Tokai set up operations in Taipei, Labuan, Kuala Lumpur, and Ho Chi Minh City. In 1994 the bank established an Asia Department and a China Department, which were designed to provide Japan's small and medium-sized companies information on and assistance with doing business elsewhere in Asia. The departments also offered their clients financial services.

Although deregulation of Japan's financial markets had been proceeding slower than expected, Tokai was able in 1995 to enter the Japanese securities market for the first time through its Tokai International Securities Co., Ltd. subsidiary, which was primarily involved in corporate bond underwriting. Tokai had, of course, years earlier already established securities businesses in Europe, the United States, and Hong Kong. As Japan's markets become increasingly liberalized, then, Tokai seemed well-positioned to transfer the expertise it had gained overseas back to its home market.