Japan’s digital lender, Rakuten Bank, announced on Friday (April 21, 2023) that the common stock of Rakuten Bank, Ltd., (securities code: 5838), a subsidiary of the Rakuten Group, has been listed on the Tokyo Stock Exchange Prime Market. It was “not created for the purpose of soliciting investment or similar acts both in Japan and overseas.”
As noted by the firm, this disclosure is “not part of an investment offer for any securities in the United States.” The securities referred to “have not been, and will not be, registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration thereunder or an applicable exemption from registration requirements.” The securities referred to “will not be publicly offered in the United States.”
Following this announcement, the shares of Rakuten Bank, which is controlled by one of Japan’s largest digital commerce firms, surged nearly 40% on their first day of trading Friday (on April 21, 2023). This, after the banking institution secured $627 million via its IPO, which is notably the largest public offering in the Asian nation since 2018.
The digital bank, which is notably Japan’s largest by number of users and has been branched out of Rakuten, the nation’s leading e-commerce firm, has now lowered its valuation ahead of the listing process.
As first reported by the FT, bankers carrying out the IPO at Daiwa Securities had to deal with a range of challenges from investors, who had been questioning the firm’s valuation and also ended up forcing Rakuten to curb its high ambitions for the share sale. This, according to sources familiar with the matter (and cited by the FT).
Established in 2000, Rakuten Bank has become a major online banking platform, serving consumers in Japan. Although the banking unit has recorded substantial profits for the last five years, investors are concerned that the Rakuten Group’s business could face challenges due to the significant losses at its mobile division.
The stock has reportedly been sold for around $10 per share during the IPO — considerably less than the ¥1,960 (about $17) at the top of the potential range. This past Friday, the newly listed Rakuten Bank shares exceeded that target to record a high of ¥1,965, meanwhile Rakuten Group fell over 2%. Shares reportedly closed 38% higher at about ¥1,930.
Rakuten Group, which is being led by technology entrepreneur Hiroshi Mikitani, introduced a mobile network during early 2020 and has been losing considerable amounts of capital since that time. Back in 2017, Rakuten had entered a 4-season-lon €55 million per year shirt sponsorship deal with Barcelona FC (a move that was not too popular with company investors).
As reported by the Nikkei, Rakuten’s mobile network unit faced a government-backed price-reduction scheme and has also managed to acquire a market share of about 3%. In February of this year, Rakuten Group reported a substantial yearly loss of ¥372.9 billion, which is its fourth consecutive year of losses. The banking division recorded an annual profit of ¥20 billion this past year.
Rakuten Bank, which is Japan’s biggest online lender in terms of total assets, made its debut on the Tokyo Stock Exchange’s Prime section, a move that indicates that the Asian nation is shifting to digital technology and contactless transfers.
An all-digital bank without physical branch locations or even its own ATMs, Rakuten Bank claims 14 million user accounts as well as 9 trillion yen (over $67 billion) in total deposits. Rakuten Bank intends to double deposits in the next four years, aiming for a target of 25 million accounts and 20 trillion yen in deposits in March of 2027.
Its deposits reportedly make up a relatively smaller fraction of the total 523 trillion yen for the banking industry in Japan, however, digital banks such as Rakuten and Sumishin SBI have been gaining a larger market share in the last few years.
Rakuten Bank President Hiroyuki Nagai noted during a conference that he has no issue with the share price.
He stated:
“The offering price reflected the market conditions at the time of the offering, which were beyond the control of the listing company.”
It’s worth noting that virtual banks in Japan are usually more profitable than traditional brick-and-mortar locations.
Rakuten reportedly has a return on equity of over 10%, when compared with only about 6% for Japan’s largest “full-service” banking institutions. Competitor SBI Sumishin Net Bank had gone public this past month and its share price surged over 30%, suggesting that investor interest for virtual banks in Japan is strong.
Rakuten Bank was initially a fully-owned division of the Rakuten Group. As part of the initial public offering, Rakuten Group has released 35% of its overall stake and secured 71.7 billion yen. The offering price of 1,400 yen places the value of the digital bank at approximately 238 billion yen.
As part of the IPO, the bank secured 7.8 billion yen in funding via new share issuance.
Nagai commented:
“We have no plan to raise additional capital through March 2027.”
For Rakuten Bank, computer systems are its primary area of investment and they will not be needing a large upgrade, he claimed.
As noted, Rakuten Bank is a major part of Rakuten’s e-commerce platform, which provides other services like stock trading, insurance, and even travel booking.
The bank’s IPO seems to have not been as widely covered as its financial challenges at the parent firm after its entry into the mobile phone business back in 2019.
It has been reported that the development of mobile infrastructure had cost Rakuten Group around $10 billion.
Group CEO Mikitani had assured investors that the major part of the investment is done with, however, industry professionals anticipating yet another loss-making year.
Back in mid-2021, S&P Global had downgraded Rakuten Group debt to “junk” status. And in December of last year, the ratings agency reduced its debt rating to BB, while citing protracted losses and a substantial rise in Rakuten Group’s debt.
The IPO is reportedly part of the Group’s ongoing efforts to secure capital from some of its notable business operations. In November 2022, the firm sold about 20% of its Rakuten Securities division to Mizuho Securities.
Nagai added:
“We expect Rakuten Group to maintain the current level of share ownership. Rakuten Group has said that it wants to keep Rakuten Bank as a consolidated subsidiary.”