IFR Editor-at-large Keith Mullin
I’ve been scrutinising 2011 capital markets and M&A data quite carefully over the past couple of weeks to check out the risers and fallers across region and product. On the basis of those numbers plus some of the early action in 2012, it’s clear that the Japanese mega-commercial banks are making a play for a bigger wallet share globally.
Of the big three — Mitsubishi UFJ Financial Group, Mizuho and Sumitomo Mitsui — it’s the latter that is making the most public statement of intent.
In the past few weeks, SMBC Financial Group and affiliates have struck a deal to acquire Royal Bank of Scotland’s aircraft leasing business for US$7.3bn; acquired a 5% stake in Moelis & Co for US$93m; bought a €590m North American and European project finance portfolio from Bank of Ireland for 85 cents on the dollar; and is actively engaged in discussions to acquire pieces of WestLB’s investment banking business, including its project finance arm. SMBC has also been actively — but selectively — bidding for assets coming out of European banks that are in the process of deleveraging.
SMBC Nikko Capital Markets has been aggressively adding headcount in London; growing from 25 in mid-2010 to around 90 at the end of last year
Speculation that the group has been eyeing international businesses has been rife for months. In a bid to expand its footprint in retail and SME banking in Asia, SMBC is expected to acquire stakes in local banks, targeting Indonesia and Malaysia as priorities. In China, SMBC Nikko Investment Consulting (Shanghai) Ltd, the business set up to provide M&A advisory services into the China-Japan corridor — has been up-and-running for just over a year.
SMBC Nikko Capital Markets, the group’s investment banking and brokerage unit, has been aggressively adding headcount in London; growing from 25 in mid-2010 to around 90 at the end of last year. More senior staff started this month and the new London HQ has room for up to 200.
Senior executives have been vocal about their intention to super-charge investment banking revenues: group president and CEO Koichi Miyata has publicly stated that he wants to triple profits away from core commercial banking by 2015.
The group upped its cross-border syndicated lending prowess in 2011. If you exclude the huge US domestic hinterland, the Japanese Top 3 dominate global syndicated lending. Mizuho was way out in front, garnering a market share of 9.9% last year (with US$144bn of bookrun credits to its name), but Mitsubishi UFJ and Sumitomo Mitsui were second and third, respectively, bookrunning almost an identical amount of deals, at just under US$100bn each. SMBC was on the docket of a significant proportion of the mega-financings completed in 2011 by global brand-name multinational companies throughout the world.
Cross-border deals
One of the group’s driving intentions is to increase the proportion of cross-border deals and to assist its clients with fundraising globally. It has been somewhat hamstrung by its small international presence. The real intent behind its acquisition of selective assets in Europe and the US is not just the ability to ride the price; it’s the ability to back-engineer access to targeted clients and build out investment banking from there. It’s a fabulous back-door opportunity, facilitated by two key benefits in this environment: access to cheap funding, and (the real killer) a huge supply of very strong yen.
Hoovering up leasing and infrastructure portfolios, and upping its syndicated lending makes a lot of sense in as far as SMBC’s low relative cost of funding will enable it to generate a decent turn. These businesses typically only make sense if your funding is cheap enough to make the low returns offered by asset finance work; they’re classic spread arbitrage businesses.
Here’s the thing, though: SMBC and its units around the world haven’t made a dent in international capital markets. The group’s lending activities flattered the rest of its investment banking receipts; of US$757m of fees earned in 2011 (according to Freeman & Co), SMBC ranked a sort of creditable 19th in the global investment banking fee league table. But around two-thirds of that came from its lending business.
In global M&A, debt and equity capital markets, the firm is languishing in that invisible zone I’ve been advising everyone to grow out of or exit. The Moelis deal, a slightly more aggressive push from its China unit, and the expected surge in Japanese outbound M&A, are likely to help SMBC up the M&A rankings.
But if it’s serious about staking a claim to a decent capital markets rank, building out the Nikko franchise organically won’t cut it. What the group executive board needs to do is target a slightly teetering mid-ranking capital markets operation in Europe and/or the US that’s under-performing and in need of help, and write the cheque now.
I think I may have spotted the perfect target: a firm that ranked 14th in global M&A and DCM last year and 10th in global ECM. A firm that if you exclude its strong domestic franchise, is languishing deep in the ’why bother?’ zone of international investment banking. It’s also a firm lacking a big balance sheet.
SMBC Nomura anyone?
