Between a rock and a hard place?

IFR Awards 2018
16 min read

Over the decades, Japanese banks have been criticised, fairly or unfairly, as having a boom-bust approach to international business. How do the international ambitions of Japan’s major financial groups stack up today amid ongoing monetary stimulus at home and a challenging environment overseas? Is it different this time?


The period since the global financial crisis has coincided with a time of heavy investment by Japanese financial institutions. Coming out of the upheaval of their own 1990s banking crisis and the economic torpor of the post-1990 period at home, Japan’s restructured and rejuvenated banks looked overseas for growth from an enviable position of strength.

Mitsubishi UFJ Financial Group’s purchase of a 24.4% stake in Morgan Stanley and Nomura buying Lehman Brothers’ European and Asian businesses were the most high-profile examples of Japanese banks moving out into the world.

But other banks acquired huge portfolios of assets from international players forced into panicked post-crisis deleveraging, in the process further globalising their geographical, client and product footprints. Mizuho’s acquisition of RBS’s North American loan portfolio, for example, added bankers in key areas such as debt origination and leveraged finance.

Japan’s mega-commercial banks also acquired, bought strategic stakes in or arranged joint ventures with Asian banks to round out their offerings in fast-growing markets closer to home.

“The Japanese banks are on our radar. They have had made a lot of progress in their non-Japan [CIB] growth strategies, even though 2018 has been a challenging year for them,” said the head of research at a leading market analytics firm.

“Their focus is different to traditional investment banks; the Japanese mega-commercial banks are mainly focusing on lending, financing, corporate derivatives, and transaction banking products associated with traditional banking business lines.”

In CIB, the three mega-commercial banks have led with their large balance sheets and have long been leading cross-border syndicated lenders. Refinitiv’s investment banking fee data (covering M&A advisory, DCM, ECM and syndicated lending) had the three megabanks plus Nomura in the top 25 global fee earners at the nine-month 2018 stage.

Notably, Mizuho, MUFG and Sumitomo Mitsui Financial Group heavily outperformed the market: while the global fee pool fell 4.8% year-on-year, Mizuho increased its take by 12.8%, MUFG by 12.4% and Sumitomo by 9.1%, and they all gained market share.

It is fair to say, though, that while the Japanese houses are slowly building better non-Japan DCM profiles (particularly Mizuho and MUFG), they are not yet competing on the top table and their international equity and advisory businesses lack scale.


Japanese banks need international profiles now more than ever given conditions at home, where BoJ stimulus has killed net interest margins (and undermined profits) and Japan’s ageing demographic has curtailed future business opportunities.

But the thorny task confronting management now is not just building business profiles that are less reliant on lending, it’s weaving everything into a coherent – and more profitable – global whole with a convincing strategic back-story. The banks are working on transforming business profiles by selectively re-allocating capital to areas of higher return, and exiting unprofitable client relationships.

Thorny because they are faced with achieving that amid parallel initiatives to cut costs, reduce headcount, and close branches at home. And they are attempting to do it against the backdrop of potentially tricky global market conditions and challenging industry headwinds.

“The Japanese banks focused on lending as a gateway to entry, using access to cheap funding,” said Benjamin Quinlan, CEO of consulting firm Quinlan & Associates.

“While they have been able to capture loan market share with cheap balance sheet, they have been less successful transitioning that traction into the capital markets and securities space. Brand identity is a key factor here. No-one cares about the brand of a bank offering cheap funding, but they do care about who’s doing their IPO or advising them on M&A,” he said.

“A core strength of the Japanese banks is their cross-border business, predominantly looking after the needs of Japanese corporates and funds. Tapping into international corporates has been more of a struggle for them.”

Of course, building sustainable businesses in the US, which is what the Japanese banks are seeking to do, is notoriously difficult.

“Anyone trying to break into the US has to have a powerful value proposition to win market share from the major American banks. If the Japanese banks want to do that, fine; but I’d say they really need to focus on the cross-border connectivity between the US and Japan and look to dominate that space,” Quinlan said.

“As long as they play to their competitive niches and core strengths, they’ll do OK. But this is not the most fortuitous time to be adopting a generalist approach. This is especially the case in the current regulatory climate, where legislation such as MiFID II is forcing banks and brokers to become disciplined about where they play and the content they produce while ratcheting up their cost base. I do think the Japanese banks will run into headwinds.”


Nomura has had its fair share of pain since acquiring the Lehman businesses, yet Steve Ashley, global head of the firm’s wholesale division, is cautiously upbeat even though he faces a significant uphill task to hit the wholesale division’s FY2019–2020 pre-tax income target of ¥200bn–¥220bn (US$1.77bn–$1.95bn), double the ¥100.6bn reported for the most recent full fiscal year that ended in March 2018. At the half-year stage, the division made a ¥2.5bn pre-tax loss.

“Market conditions remain very challenging, but the changes we’ve made to our wholesale business since April 2016 have left us with a solid core operating business with a proven track record. Our flow macro business, despite a challenging last few quarters in some regions, continues to be a large contributor to overall profitability for wholesale,” Ashley said.

In terms of priorities, Nomura will continue to focus on reinforcing its agency execution business Instinet by positioning it as a multi-asset platform.

Business diversification is high on the agenda: one area earmarked for growth is the Americas advisory franchise. Nomura launched a private-side business unit – client financing and solutions – in April, taking content from IB advisory, client coverage, and sales and structuring in global markets to create a suite of structured credit products. The firm is rolling this out internationally with a view to increasing cross-selling.

“Alongside the implementation of client financing and solutions, Nomura is in a good position to take advantage of growing demand for financing and solutions, especially corporates,” said Ashley, who believes Nomura can add value in the space between traditional bank lending and leveraged loans, for example.


Daiwa’s push, meanwhile, includes a move to business diversification alongside more standard measures of increasing throughput from ECM and DCM, and strengthening the M&A platform.

The firm acquired US boutique investment banks Sagent Advisors and Signal Hill Holdings in 2018, forming DCS Advisory to focus on M&A advisory and private capital raising. With the existing London-based DC Advisory mid-cap M&A business, Daiwa has a 500-strong advisory platform. At the time of the US acquisitions, its president and CEO Seiji Nakata said expanding the M&A advisory business was core to the firm’s strategic growth.

In the near term, the key focus for Daiwa Capital Markets Europe in London is to make sure the business is protected through Brexit. A newly-established subsidiary in Frankfurt will ensure that clients continue to have access to the same products and services; DCME will also look to expand its DCM franchise into Eastern Europe and the Nordic region.

“Looking further ahead and in terms of what our strategic journey is, the old business model is changing rapidly on the back of changes like MiFID II and lower volumes and low volatility in fixed-income. A key strategy for us is finding new revenue lines,” said Keith Meekins, chief executive of DCME and chairman of DC Advisory. “Part of that will be a greater focus on Green and SRI products but beyond that, we are looking to put more capital to use in innovative new business areas.”

DCME is looking at potential bolt-on acquisitions as well as building new business lines, including potentially through joint ventures. A recent departure was the establishment of a principal investments business providing debt finance in UK real estate. It is now looking to exploit other potential opportunities in the EMEA region, including in Africa.

“The only way banking businesses today will survive will be creating new sources of revenue away from traditional business lines. Our strategy is to diversify our revenue streams, as income from our regular businesses dries up. We will continue offering sales and trading capabilities; that’s bread and butter business but where will that be in five years? As standalone businesses, unless you have primary origination capacity, I question its long-term viability,” Meekins said.


Mizuho and MUFG have both adopted integration strategies using the “One Mizuho” and “One MUFG” tag-lines. Mizuho’s core strategy for expanding its business with non-Japanese companies is centred on the Global 300, a group of around 300 global blue-chip companies.

On the numbers, the breakdown of non-interest income by business at the fiscal half-year stage showed a 13% year-on-year increase in banking income outside Japan to ¥92bn, with Asia out-performing (turning in a plus 26% performance). The international component of group securities revenues, meanwhile, was flat at ¥16bn. Following a sharp dip in fiscal H1 2015, net interest income from international operations has been showing consistent half-yearly increases, hitting ¥111.1bn at the 2018 fiscal H1 stage.

Loan growth outside of Japan continues: the international loan balance increased 11% year-on-year at the fiscal half-year stage to US$240bn, propelled by average loan spreads that, at 85bp, were 75% higher than spreads on loans to large corporate customers in Japan. Off the back of that, profits from non-Japanese transaction banking have risen steadily: from US$280m for fiscal first-half 2016 to US$380m a year later, to US$480m in the latest numbers for the fiscal 2018 first-half. Profits came predominantly from Asia.

The focus on increasing market share and revenues in US DCM continues and the bank is sticking to its target of a top 10 league-table position.

“We are leveraging our presence in US dollar debt markets in order to strengthen our DCM business in Europe and Asia. Also, we are developing a global sales and trading framework, developing competitive products and improving our business infrastructure,” said a senior Mizuho spokesperson. Key areas of focus include transaction banking, US structured finance and US non-investment-grade activities.

MUFG is undergoing a process of more closely integrating its commercial banking, trust banking and securities businesses as it seeks to build an origination-to-distribute approach and shift away from its loan-centric business model.

“We are working on enhancing product capabilities … and replacement of low-profitability assets with high profitability assets. It is a shift from a volume focus to a ROE focus approach. Although it will come with a temporary decrease in earnings, we must follow it through,” Nobuyuki Hirano, group CEO said at the fiscal half-year results presentation on November 16. On the earnings point, the group’s targeted ROE of 7%–8% in FY2020 is forecast to be significantly below the 9%–10% medium to long-term goal.

“We will leverage our status as a top-tier global debt house to help clients tap into new pools of liquidity, such as the Samurai market, while adopting a disciplined approach towards event finance and acquisition finance initiatives across Asia,” said Geoffrey Coley, international head of MUFG’s securities business.

“For the past three years, we’ve been in growth mode, launching a number of initiatives to build upon our group’s strong foundation and global reach. Even with this, our markets platform is still in the nascent stages of its evolution,” Coley said.

“Historically, we’ve been focused on corporates, and while they will continue to form our central core of clients, there is a huge opportunity for us to expand into financial institutions through our suite of origination, structuring and distribution capabilities.”

To do this on a global basis, the firm is blurring lines between entities. “The de-siloing of our Japanese and non-Japanese business units is a clear indication of our commitment to this,” Coley said. Since October 2018, global business lines have been headed by managers all over the world who have responsibility for the domestic Japanese business units as well as those outside Japan.

The Americas is a key growth area. In October, MUFG Union Bank acquired Intrepid Investment Bankers, a regional mid-market investment banking boutique based in Los Angeles. The firm is also focused on growing its leveraged finance business, where it recently led its initial Term Loan B transactions.

“Entry into this space strategically ties to our activity in the CLO market, having launched CLO warehousing in the past year, and building out our loan trading operations,” said Coley.

SMBC’s medium-term plan is focused on seven core business areas. In the CIB sphere, this includes an aspiration to increase market share in key global markets and strengthen sales and trading capability.

On the international front, group CEO Takeshi Kunibe said at the BofA Merrill Lynch Japan conference in September that the group is working to improve asset efficiency by rebalancing the business portfolio in favour of global products such as high-profit assets and project finance where the group has strengths. And like its rivals, promoting cross-selling is high up the list of priorities.

Among major international initiatives is a push not just to strengthen global products but to promote cross-selling to improve asset efficiency, and mid-to long-term growth in Asia. Like its megabank peers, SMBC is working to enhance relationships with corporate clients and offset lower interest income by pivoting to non-interest income to transform its profit structure.

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