By Takahiko Hyuga and Finbarr Flynn Jan. 6 (Bloomberg) -- Goldman Sachs Group Inc. plans to convert 100 billion yen ($1.09 billion) of preferred shares in Sumitomo Mitsui Financial Group Inc. into common stock as early as April, a person familiar with the matter said. Goldman Sachs, the world’s most profitable securities firm, may convert its 33,400 preferred shares in the fiscal year starting April 1, the person said, declining to be identified. Separately, Sumitomo Mitsui, Japan’s second-largest bank by market value, plans to sell 800 billion yen of shares, people with knowledge of the matter said yesterday. Sumitomo Mitsui President Teisuke Kitayama is under pressure to boost capital that trails the average among global rivals, according to Standard & Poor’s. Kitayama said last month he doesn’t want to be “slow off the block” in following larger competitor Mitsubishi UFJ Financial Group Inc. to sell shares. “In this capital environment it’s good for Sumitomo Mitsui to get Goldman to convert the preferred shares,” said Keisuke Moriyama, an analyst at Nomura Holdings Inc. in Tokyo. “Most people already look at the Goldman shares as being fully diluted, so it is not such negative news.” The Nikkei English News earlier reported that Sumitomo Mitsui asked Goldman Sachs to convert its preferred shares into common stock, without saying where it got the information. Goldman Sachs’s Tokyo-based spokeswoman Hiroko Matsumoto declined to comment. Kyosuke Hattori, a spokesman for Sumitomo Mitsui, said no decision has been made about asking Goldman Sachs to convert its preferred shares. Bolstering Capital The New York-based firm bought 150.3 billion yen of preferred shares in Sumitomo Mitsui in 2003 to help bolster the bank’s capital, eroded by losses on stockholdings and bad loans. Goldman Sachs converted a third of the securities into common stock in April 2008. The conversion of the U.S. firm’s preferred stock, combined with an 800 billion yen equity sale, may dilute the value of Sumitomo Mitsui’s common shares by about 2.5 percent, the person familiar with Goldman’s plans said. Sumitomo Mitsui shares closed at 2,653 yen yesterday, down from 8,950 yen on April 30, 2008. The stock climbed 4.9 percent today as of 1:24 p.m. in Tokyo trading. The bank has already appointed Goldman Sachs, Citigroup Inc., Nikko Cordial Securities Inc. and Barclays Plc to lead manage the share sale, the Financial Times reported, citing a person familiar with the matter it didn’t name. Balance Sheets The company and rivals Mitsubishi UFJ and Mizuho Financial Group Inc. have raised $30 billion in common stock sales since December 2008 to replenish balance sheets that Standard & Poor’s estimates are among the weakest of the world’s biggest banks. Sumitomo Mitsui trades at 0.7 times book value, compared with an average of 1.9 times for the 50 closest banks worldwide by market value, according to data compiled by Bloomberg. The company had a core capital ratio, a key indicator of financial strength, of 5.9 percent on Sept. 30, even after raising 861 billion yen through July, according to by UBS AG. Goldman and Sumitomo Mitsui’s cooperation dates back to 1986, when the Japanese company invested $500 million for a 12.5 percent stake in the U.S. firm. While Sumitomo Mitsui has since sold the holding, Yoshifumi Nishikawa, former chief executive at Sumitomo Mitsui, served on Goldman’s Japan advisory board and Goldman’s Japan Chairman Akio Asuke was deputy president of Sumitomo Mitsui’s banking unit. Japan’s three biggest lenders were ranked in the bottom five of 45 global banks in a study by S&P in November that examined risk-adjusted capital, a measure that adjusts for reporting differences. Sumitomo Mitsui was at 3.5 percent, compared with the global average of 6.7 percent and 9.2 percent for HSBC Holdings Plc, according to the ratings company. Mitsubishi UFJ raised 1.03 trillion yen in a share sale in December. Sumitomo Mitsui was prevented from selling more stock until Dec. 19 under the terms of its share sale last year. Mizuho is barred from selling stock until Jan. 10. To contact the reporters on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

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