Shinsei Bank, the Japan-based diversified financial institution which agreed to merge with smaller rival Aozora Bank, intends to clean up unprofitable investments in its balance sheet this quarter.

Reportedly, the bank has been paring back its investments in overseas securities and focusing on its domestic lending business after realizing a loss of JPY143bn in 2008.

Masamoto Yashiro, CEO of Shinsei Bank, said: “I want to clean up all our negative legacy assets by the end of March. It’s important to do this conservatively.”

However, Shinsei reported a net income of JPY11.2bn for the three months ended December 31, 2009, compared with a loss of JPY12.8bn in 2009. Shinsei left unchanged its full-year profit forecast of JPY10 billion yen, citing the potential for impairments and charges on real estate, consumer lending and other assets.

Kristine Li, a Singapore-based credit analyst at Royal Bank of Scotland, said: “If the charges are big enough, Shinsei may have to book a loss for the full year. If the losses hurt their capital, this may affect the merger. They may have to re-negotiate the merger ratio.”

Aozora Bank is controlled by New York-based private equity firm, Cerberus Capital Management, whereas Shinsei Bank is backed by billionaire Christopher Flowers.