After the bunker mentality of the early 2000s, when some banks sold off almost all their overseas assets, Japan’s big banks are increasingly turning their attentions abroad. Charles Smith reports.
Japanese banks are coming back. Between the early 1990s, when they were still regarded as world beaters, and 2003, the year that marked the crux of domestic non-performing loan crisis, overseas loan exposure by the top eight Japanese banks (since merged into three so-called ‘mega banks’) shrank by about 80%. In the past three years, estimates Brett Hemsley, head of research in Tokyo for HSBC Securities (Japan), overseas lending by the three mega banks has doubled. And that could be just a beginning.
All three mega banks, Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank (the wholesale arm of the Mizuho Financial Group) and Sumitomo Mitsui Banking Corporation (SMBC), have set targets that identify global markets as one of the most exciting prospects in an otherwise uninspiring world. Sumitomo Mitsui, smallest of the three megas, aims to raise gross profits from its international business by 32% over the next three years, by focusing on special fields such as project loans and ship finance in Europe and the US, and conventional corporate lending in Asia. Meeting the target would raise profits from global business to about 15% of SMBC’s total revenue, up from 11% to 12% today.
Yoshinori Kawamura, head of the foreign business and investment banking units at SMBC, says the target is tough but achievable. It could be exceeded if SMBC adds acquisitions to organic business growth over the next couple of years. Mr Kawamura stresses, though, that this probably means hiring specialised teams or divisions that might become available as a result of consolidation of the European banking industry, rather than buying entire institutions.
Mizuho Corporate is committed to attaining a 40/60 ratio of offshore to gross revenue during its next full financial year, up from a 32% share for global business in the year to March and 22% a year earlier. Hidetake Nakamura, managing executive officer and head of the bank’s international business unit, says the ratio is attainable and admits he is under pressure from Hiroshi Saito, president of Mizuho Corporate, to move even faster.
Mizuho’s high target for international business in part reflects the fact that a different entity, Mizuho Bank, looks after the group’s domestic retail business.
Bank of Tokyo-Mitsubishi UFJ, the largest of the three megas, is also the most reticent, possibly because the bank is smarting under a business improvement order issued in June by the Financial Services Agency, Japan’s chief financial regulator, which accused the bank of loose discipline and faulty compliance in its big overseas branch network. However, Mitsubishi UFJ Financial Corporation (MUFG), the financial conglomerate that includes Bank of Tokyo-Mitsubishi UFJ and a US affiliate, Union Bank of California, published a presentation of its 2006 business results in May which targets overseas corporate business at 20% of its net operating profit in its 2009 fiscal year (ending in March 2010), up from 15% in 2006.
This assumes the success of an ‘equity and alliance strategy’ focusing on Asia (growth would be slower if the bank relies only on organic growth).
Profits for MUFG are forecast at ¥2500bn ($21.2bn) in 2009, up from ¥1600bn in 2006. So the group appears to be thinking in terms of a maximum 108% gain over three years in profits from its global business. Underlying MUFG’s drive to increase foreign business is its target of becoming one of the world’s top five banks in terms of market capital.
Spokesman Shinji Munekuni says the bank needs to do that to be picked as a core Asian bank by multinational corporations.
Bad loan expertise
The megas are not the only Japanese banks looking abroad. Shinsei Bank, successor to the defunct Long Term Credit Bank (LTCB) of Japan, which was re-listed in early 2004 after being nationalised and subsequently sold to an international investor syndicate, has followed an enterprising offshore strategy that exploits the bank’s skills in bad loan disposal, garnered from its own experiences in cleaning up its loan book after the collapse of LTCB.
The strategy has led to the creation of joint ventures with South Korea’s Woori Bank and with two publicly owned German regional banks, which have earned Shinsei profits of 10% to 15%, on the strength of its loan disposal and property trading skills. Japan’s mega banks are too risk-averse to do this kind of business, says Hironari Nozaki, managing director of equity research at Nikko Citigroup.
Sumitomo Trust and Banking Co, Japan’s last surviving fully independent trust bank, and the sixth largest Japanese bank in asset terms, has parlayed its years of experience as custodian and asset manager serving Japanese corporate pension funds into three overseas businesses:
- Custody services for the foreign securities portfolios of Japanese individual investors, through subsidiaries in New York and Luxembourg.
- Advising non-Japanese investors in Japanese securities.
- Acting as a consultant for foreign companies in China on Chinese corporate pensions.
Chinese pension market
Strictly speaking, China does not have corporate pensions at present, admits Sumitomo Trust deputy president Takaaki Hatabe. Retirees from big Chinese companies normally receive lump-sum payments. However, a pension law was enacted in 2004 and Mr Hatabe thinks China will move rapidly through the pension development process, perhaps graduating directly to defined compensation schemes within the next year or two. “Foreign companies must understand the Chinese pension system as well as employment contracts and we are currently the only specialised adviser on either topic,” says Mr Hatabe.
Japanese banks’ sorties into global markets do not mean that Japan is about to recapture the dominant role it played in the late 1980s and early 1990s. Japan has a big home market so it is natural for Japanese banks to have a relatively small overseas business segment and a much larger domestic one, says SMBC’s Mr Kawamura. In that respect, he adds, Japanese banks resemble US banks, which (with a few prominent exceptions) are 70% to 80% dependent on domestic business, whereas European banks with smaller home bases and a single currency are naturally far more involved outside their national frontiers.
HSBC’s Mr Hemsley concurs. He says that the circumstances of the late 1980s, when Japanese banks dumped loans on world markets because they had “no concept of the cost of capital”, are unlikely to be repeated. However, Mr Hemsley notes that some Japanese banks have come from almost nowhere in the past year or two to be important players in a handful of specialised markets such as project loans and leveraged finance.
A dramatic instance of Japanese emergence was Mizuho’s third ranking position in the global project loan market in 2006, with a 40% increase in the value of loans from a year earlier. In the same year, SMBC ranked second in Asian syndicated loans, a market previously dominated by European banks, and seventh in European ship finance, a market where it was not a player until 2003.
Mr Hemsley suggests that lack of shareholder pressure on Japanese banks to maximise dividend payments may have given them resources to buy market share in some of these sectors, though he believes this should be no more than a minor irritant to other global players. Some foreign analysts see things differently. Until mid-2006, says Nikko Citigroup’s Mr Nozaki, Japanese banks were busy paying back to the government huge sums borrowed in the form of preference shares during the financial crisis of the early 2000s, But, with public money repaid, banks became free to act.
Mizuho’s Mr Nakamura says that when his bank returned to the world in 2005, it took two routes. The first was to reactivate business, such as project lending, where the bank had been a leader in the 1990s but sluggish at the start of the 2000s. The second strategy involved entering completely new markets where “we had to study what to do”. As an example of the second approach Mr Nakamura cites the creation in April of a global alternative investment unit, with operating companies in the UK and the US.
In London the bank hired a specialist on loan securitisation to build a team that has given the bank an edge in sales of collateralised loan obligations. SMBC’s Mr Kawamura tells a similar story about ship finance, although in this case the bank acquired a team (from BNP Paribas) rather than a single individual.
Discussing the global project and syndicated loan markets, Mr Kawamura adds that the sheer size of deals has given Japanese banks an entry. With deals of $5bn or $10bn it is unsurprising that business should be spread around, says Mr Kawamura. Typically one bank might take a $1bn share in such cases, so if Japanese banks are becoming significant players, no-one should be surprised.
Japanese banks have regained an edge in making such loans as their ratings have been upgraded by international agencies such as Moody’s, but Yoshinobu Yamada, bank analyst at Merrill Lynch Japan, thinks it may still take between one and three years for the Japanese to obtain full ratings parity with their global counterparts. Once that happens he believes it will be easier for Japanese banks to head international loan syndicates or to retain top international talent if their acquire foreign institutions.
Asian emphasis
A more fundamental point that all major Japanese banks make about their offshore business is that the biggest sector is still corporate lending to Japanese corporate customers in Asia, usually in local currencies. Bank of Tokyo-Mitsubishi UFJ claims predominance in overseas corporate loans because of its big overseas network of 106 branches inherited from the old Bank of Tokyo, which merged with the former Mitsubishi Bank in 1996. But Mizuho’s Mr Nakamura says the Asian market is his bank’s biggest foreign earner. He cites the example of China, where an estimated 10,000 Japanese corporations operate 30,000 to 40,000 outlets.
To serve Japanese clients, both Mizuho and Bank of Tokyo-Mitsubishi UFJ established wholly owned subsidiaries in China in summer 2007 to take advantage of Chinese regulations that claim to treat locally incorporated foreign banks equally with Chinese banks. “The biggest advantage we have now,” says Mr Nakamura, “is that when we open a new branch in China we can begin renminbi loans to our customers almost at once, instead of waiting for perhaps one year.”
SMBC is still “studying the pros and cons” of setting up a Chinese subsidiary. “Costs shoot up when you do this,” says Mr Kawamura. And there are still regulatory restraints such as how many branches you can open and permitted exposure to one borrower measured as percentage of capital.
A point on which all the Japanese majors agree is that becoming a global player is a matter of organisation and culture, as much or more than hitting targets in particular fields. Japanese banks had the chance to become true global players in the late 1980s and early 1990s, says Mizuho’s Mr Nakamura, “but we didn’t, in part because of the language handicap”.
Since global business became a prime focus for the bank three years ago, Mizuho has stepped up English language teaching throughout the bank. More fundamentally, about two years ago, Mizuho began reorganising its internal organisation on a matrix principle, which divides departments into revenue earning business units, such as international or corporate business, and service groups dealing with areas such as personnel, compliance or IT.
In the matrix system, service groups are responsible for the bank’s entire operations, including the overseas branch network. This is a basic departure from the old system in which service groups were self-contained entities handling the domestic side of the business while the international department was isolated from the rest of the bank’s operations.
“The new system means that the work of business unit heads and service group managers has become much more inter-related and far more intensive,” says Mr Nakamura. But it also means that Mizuho is set up, for the first time, to manage its overseas operations in the same way as it runs its operations in Japan.
Non-Japanese staff
The employment of non-Japanese staff in senior positions is another sign that the big Japanese banks are looking beyond their borders. None of the three megas have foreign directors but SMBC hired its first senior executive officer (shikko yakuin) in 2006 and Mizuho Corporate followed with two such appointments in 2007. Mizuho now has 10 non-Japanese general managers (out of roughly 100), including Deborah Hazleton, co-manager, but soon to become sole manager of its Sydney branch.
From there to holding board meetings in English and appointing non-Japanese directors (something Japanese shipping lines began doing five years ago) may sound a long road to travel. But for organisations whose main market is always likely to be Japan, it is a significant start.
After the excesses of the 1980s, when they flooded foreign markets with cut price loans, and the bunker mentality of the early 2000s, when some banks sold off almost all their overseas assets, Japan’s big banks are at last starting to look like reliable international players.
