Big in Japan – and getting bigger elsewhere
If 2015’s banking narrative was supposed to centre on a defensive strategy re-think, replete with slashed assets and diminished headcount, no one told Japan’s ambitious commercial mega-banks.
While many of their Western rivals went into full-on retrenchment mode this year, Japan’s commercial banking giants, BTMU, Mizuho and Sumitomo Mitsui, continued their global expansion.
In doing so, they secured impressive footholds in the upper division of the league tables: all three came in the top 20 of global investment banking fee earners in the first 11 months of 2015, according to Thomson Reuters/Freeman data, which captures wallet across M&A, debt and equity capital markets, and syndicated lending.
In the US, BTMU (16th) and Mizuho (18th) stand as the sole Japanese representatives of the top 20 IB fee earners, and the same was true in US investment-grade corporate DCM – arguably a more representative data set, given their business profiles. Here, Mitsubishi UFJ won a creditable 11th place, with Mizuho in 12th.
The rise of the Japanese banks is no accident, and their ambitions to break into the top 10 – and become major forces on Wall Street – are far from fanciful. They were underwriters this year on an impressive list of US M&A and corporate DCM trades across the energy and power, telecoms, healthcare, consumer and automotive sectors.
Their best-in-class lending profiles clearly support the capital markets build-out. In the first 11 months of 2015, BTMU, Mizuho and SMBC – in that order in the league tables – were responsible for close to 10% of global lending. Ex-US, the Japanese banks stand first, second and third – and between them were responsible for one dollar in every six lent. In a US$1.34trn market, that is impressive.
Only a third of BTMU’s primary loan book went to Japanese borrowers, while not far off half went to US borrowers. The average ticket size in Japan was US$56m; in the US it was closer to US$215m.
While there is a link between lending and DCM, though, the rise of the mega-banks goes way beyond that. They certainly use their large balance sheets as leverage: in the past year they pushed the integration card and cross-sell between corporate banking and capital markets more assertively.
They continued to acquire bank stakes and banking assets in core areas; they opened branches or established presences in multiple locations to support the expansion of Japan Inc and build local relationships; and they undertook very many collaboration agreements and alliances with financial institutions the world over. They also hired talent, deepening their origination, syndication, coverage, trading and distribution franchises.
To boost its London-based capital markets and fixed-income business, Mizuho brought in Christian Heiberg to head rates and credit trading and to partner with fixed-income sales head Nicolas Pourcelet to expand the bank’s franchise. The team has grown through additional hires in rates and swaps trading as well as syndicate. In derivatives, Mizuho’s initial focus will be the capital-light cleared rates space and on financial institutions and hedge funds for euro and dollar vanilla swaps and FX forwards.
The bank added Andrew Feachem and Juan Carlos Martorell from Lazard to co-head structured solutions, while in the US Eric Shenker joined from CRT Capital to run US equity trading.
“The landscape has changed in the last few years,” Pourcelet told IFR.
“There is less competition, as many rivals are cash-constrained. That is less of a problem for Mizuho. The group is gradually expanding its international earnings by lending to corporates and providing secondary services and solutions, including derivatives, for clients.”
Mark Wheatcroft, head of primary debt markets at Mizuho International, said investment-grade corporates would remain the focus of the business but that the bank was also looking elsewhere.
“We are well disposed to bridge financing and take-outs in the bond markets,” he said. “And while we don’t have a classic European M&A platform, we are open to acquisition finance where it supports our target clients.”
BTMU meanwhile may not have executed a major acquisition in 2015, but it is quickly expanding its securities business. Having hired Wall Street veteran Geoff Coley in mid-2014 to run the front-office capital markets and securities operations, it made a key additional hire at the start of 2015 in Paul Young, former head of EMEA DCM at Citigroup, as head of international capital markets at the group’s securities business. Alex Pierre joined as co-global head of structured products and sales; and Kennis Wong was added to run Greater China DCM.
“MUFG is a formidable group with a significant global footprint,” said Young.
“At a time Western banks are under increasing balance sheet and regulatory pressure, we are well set up to move forward in an integrated fashion and to evolve our previously loans-driven approach through enhanced cross-sell, and build scale around our core client relationships using our growing product expertise and global distribution franchise.”
The bank installed internal relationship managers to work the cross-sell, and is collaborating with its Union Bank subsidiary in the US and with Morgan Stanley (of which it owns a nearly 22% stake).
MUFG and SMFG each unveiled three-year plans in May. For MUFG, enhancing, reforming and expanding businesses within CIB, sales and trading, investor services and asset management is essential.
The bank said in its strategy statement that it wants to establish a “unique global CIB model” to consolidate the group’s sector-specific expertise while deepening strategic collaboration with Morgan Stanley.
“Outside Japan, we will supplement the loans that have traditionally driven growth by accelerating the provision of a diverse range of high value-added products and services, which will then enable us to achieve further sustainable growth,” it said.
“At the same time, we will strive to develop an origination and distribution business on a group-wide basis that pursues capital efficiency by utilising relationships with institutional investors.”
In sales and trading, MUFG will integrate operations of subsidiaries BTMU and MUMSS, plus its overseas securities subsidiaries.
“Through these efforts, we aim to achieve an approximately 10% increase in gross profits from sales and trading operations over the three-year period,” the bank said.
While SMFG is more Asia-focused, the group is also seeking to create what it calls a unique global corporate and investment banking business model.
“We are strengthening the collaboration between SMBC and SMBC Nikko Securities, and accelerating the integration of business activities of domestic and international offices for a more seamless operation,” it said in its statement.
“Further, we will fully leverage the solutions-providing capability of SMBC’s Corporate Advisory Division, where an extensive knowledge of domestic and overseas industries has been concentrated,” it said.
“We will shift our business model in order to achieve sustainable growth by improving efficiency of assets, while depending less on lending volume. At the same time, we will enhance our global franchise.”
The group said a new business model would meet the needs of institutional investors by establishing a group-wide framework, centred on SMBC and SMBC Nikko Securities, that would, among other things, improve the ability “to source, underwrite and distribute deals domestically and internationally”.
To boost expansion, SMBC’s US$2.2bn acquisition of General Electric’s European Sponsor Finance business – along with most front-office staff and around a third of the unit’s 130 total headcount – was noteworthy
The GE business provides unitranche, direct lending and other types of financing to European mid-market, private equity-backed corporations. The acquisition has dramatically increased the size and stature of the bank’s European leveraged finance and high-yield business, a core component of its international out-build.
Meanwhile, Mizuho’s acquisition of RBS’s North American asset portfolio, consisting of some US$36.5bn in loan commitments (including US$3.2bn of drawn assets) was perhaps the trade of the year for the Japanese banks.
It gave the bank credit and associated derivatives exposure to around 200 mainly investment-grade US and Canadian clients, along with coverage, debt and loan capital markets, syndicate, and associated capabilities.
Some 200 RBS bankers transferred to Mizuho as part of the sale, including senior DCM and loan bankers as well as coverage professionals and corporate financiers. John Koudounis, president and CEO of Mizuho Securities USA, said the transaction had accelerated the firm’s growth plans by about two years.