The sun rises again

IFR Review of the Year 2013
9 min read

Japan’s three mega-commercial banks and the country’s leading investment banks are on a roll. Results for the second quarter of the 2013–14 fiscal year, unveiled in mid-November, were spectacular and easily outperformed those of peers in the US and Europe. Outlook for the full fiscal year is bullish, as the banks set about targeted growth at home and internationally.

Japanese banking is back in the game.

The Japanese government’s year-old package of aggressive monetary stimulus and fiscal and structural reforms designed to boost moribund economic growth and kill deflation may not yet have run its course. Abenomics have had a dramatic impact on the yen and on the Japanese stock market – and in turn on Japanese banks.

The US dollar/yen rate began 2013 at 86 but quickly fell to above 100 and, bar a mid-year wobble, has stayed there. In parallel, the Nikkei 225 saw a 49% rise over the same period and was similarly holding its level as year-end approached.

Significant revaluations of the large stock of equities held on Japanese banks’ balance sheets immediately boosted profits, which were also helped by better performances across the suite of products as consecutive quarters of positive growth created a more conducive backdrop for the industry.

Mitsubishi UFJ Financial Group’s net income for the first fiscal half was up 83%; Mizuho’s more than doubled, while Sumitomo Mitsui Financial Group’s number was up 78.5%. The banks’ second fiscal-quarter results revealed a bullish outlook for the full 2013–14 fiscal year ending March 31, with all three raising full-year profit goals.

Beyond the mechanical benefits of higher equity prices, the extraordinary turn of events perhaps more importantly gave Japanese bank senior management a new-found sense of confidence that provided a strong impetus to set in train some impressive strategic growth and build-out measures. While growth plans incorporate the US and Europe, Japanese financial institutions are looking to add firepower in Asia and create brand franchises in what they consider their home market.

Mizuho, for example, has a goal of establishing itself as the No.1 Asian debt arranger and wants to become a core bank in Asia for non-Japanese multinational corporate clients with a strong presence in syndicated lending and bond markets. MUFG similarly sees Asia as an important engine of growth. By building out its CIB platform and growing areas like FX (expanding its renminbi presence and adding Asian currency options capabilities) the group aims to increase FY14 gross profits in Asia by 50% relative to FY11. By comparison, the Americas growth target is 30% and EMEA, 20%.

Daiwa, meanwhile, has signed business alliances with Indonesia’s Bahana Securities and Thailand’s Thanachart Securities. “These initiatives will strengthen Daiwa’s global equity coverage, allowing us to increase our equity trading commissions,” said Masaaki Goto, chairman of Daiwa Capital Markets Europe. “Such strategic moves are important for the future health of our business but ultimately our growth as a firm will be achieved by linking Japan with Asian growth.”

The megabanks had already had a pretty good crisis, swerving the worst effects of the European sovereign troubles and largely staying out of the limelight of fines, misdemeanours and other wrongdoing that continues to beset their US and European peers (although the business improvement order slapped on Mizuho for its dealings with organised crime syndicates was a serious exception).

Outside Japan, the banks have actively sourced assets through the bank deleveraging process and have all enunciated aggressive revenue growth and business expansion plans. Their acquisitions have been far more than mere asset-gathering; they have judiciously backed themselves into target client-relationships in focus geographies and expanded in specific product segments.

Tougher going

Without massive balance sheets and loan-led relationships to work off, Nomura and Daiwa, the two leading independent investment banks, have found the going tougher. They have undergone root-and-branch business reviews and are still fine-tuning business profiles, headcount and cost-bases, but they have made significant progress, and their second fiscal-quarter results offered grounds for optimism.

In the first half of the fiscal year Nomura posted the highest net income since fiscal year 2002–03 and all core businesses reported significantly improved performance. Global wholesale revenues were up 60% on a year ago to ¥194.6bn, while fixed-income revenues climbed 39% to ¥97.6bn and investment banking revenues rose 70% to ¥25.6bn. Despite having to deal with rigorous cost control and a business realignment programme, Nomura is still Japan’s leading investment bank.

“We are pleased with the steady progress we have made towards meeting the 2015–16 profitability targets we set in September 2012. While the revival of the Japanese markets has contributed to the overall positive momentum, we are particularly encouraged by the progress we are making in our international operations,” said Atsushi Yoshikawa, CEO of Nomura’s wholesale division and president and group COO of Nomura Holdings.

Certainly, a much better following wind at home, a friendlier investment banking business environment and a more conducive macroeconomic backdrop will have boosted the investment banks’ chances of meeting turnaround goals and stands them in good stead to benefit from a better environment across advisory, financing and trading.

At ¥92.8bn, Daiwa’s first-half group earnings were a record since the group started to report consolidated interim results in 1995. Masaaki Goto is as bullish as Nomura’s Yoshikawa. “These are certainly strong results which the firm will be looking to build on,” he said.

Net operating revenues at the wholesale division were up 75.3% year on year, while an increase in equity and fixed-income, currencies and commodities revenues pushed the business into profit at the ordinary income level.

“Global investment banking demonstrated its health through large-scale bond issuance and CB deals this year,” Goto said. “Our home market of Japan has enjoyed a strong year to date but the firm is also benefiting from refocusing its international investment banking business on its core strengths outside of Japan.”

Cross-sell imperatives

Mizuho, MUFJ and Sumitomo Mitsui occupy the number one, two and three positions respectively in the international syndicated loan league table (that is, excluding the domestic US market). One of the big changes they’ve unleashed in the current business cycle is the notion of maximising wallet share through cross-selling, a strategic focus across the entire industry.

For MUFG in investment banking, that means playing more aggressively off the Morgan Stanley relationship, not just in Japan through Mitsubishi UFJ Morgan Stanley Securities but also partnering on joint assignments in the US and Europe. The group plans to create large-scale event-driven opportunities with Morgan Stanley and plans to add new client relationships by approaching companies acquired by Japanese firms. It wants to be number one in cross-border M&A involving Japanese corporations by fiscal year 2014.

MUFG is also pushing for a broader role for its own Mitsubishi UFJ Securities (MUS) business. Because MUMSS runs the yen business out of Tokyo, MUS is perhaps in the odd position of being a global multicurrency investment bank and broker-dealer subsidiary of a major Japanese bank that isn’t anchored in yen.

On the notion of cross-sell, Paul Morganti, international head of capital markets at MUS based in London, saw opportunities at the time of the financial crisis. His firm wanted to develop a global capital markets platform commensurate with its global balance sheet. But before the crisis the investment needed was too much. That changed “in 2008 when the financial crisis marginalised most bulge-bracket firms, reducing their commitments to clients and opening a door for us to enter the market and leverage our considerable balance sheet commitments”, he said.

At SMBC, the goal is similarly to develop deeper synergies between the lending business and Nikko, the group investment bank. The group is through the three-year transition plan put in place when SMBC ended its joint venture with Daiwa and acquired Nikko from Citigroup, so the focus of management is on execution in financing and advisory and channelling wealthy individual clients into a Nikko relationship. As it builds out its international profile, the investment bank is adding headcount across the range of its core investment banking product lines.

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