Euromoney, June 2009

One contender leaves, and another enters. The revolving door of foreign participation in Japanese domestic brokerage has taken a few more turns this year, with Citi selling its Nikko Cordial retail brokerage to Sumitomo Mitsui Banking Corporation, and Morgan Stanley striking a joint venture deal with Mitsubishi UFJ Financial Group.

Forming a judgement on Citigroup’s enterprise is tricky. It is tempting to add it to the file marked “failed foreign attempts to penetrate Japanese retail”, alongside Merrill Lynch’s venture with Yamaichi. But the truth is we’ll never know whether Citi really could have made it work as it was still a work in progress after just two years, and the imperative to sell it was driven by problems at head office, not in Japan.

But as Citi departs retail, another foreign house moves in. In March Mitsubishi UFJ followed up its $9 billion investment in Morgan Stanley last October – which, with hindsight, one could argue was one of the true turning points of the financial crisis – with a joint venture combining Mitsubishi UFJ Securities with Morgan Stanley Japan Securities. This creates a single venture including Mitsubishi’s domestic retail brokerage network, the full range of institutional businesses offered in Japan by both sides, and the international reach for Japanese clients offered by Morgan Stanley.

So why should this do any better than previous contenders? Unlike Nikko Cordial, which had remained a separate business to the institutional arms of the Nikko Citi venture, this starts out as a single business. Morgan Stanley’s position, privately, is believed to be that a structure that combines retail and institutional capabilities in a single company from day one has a better foundation. On top of that, there is a belief that the links with the broader MUFG organisation, now locked in with the stakeholding and MUFG’s representation on the Morgan Stanley board globally, provide an additional layer of support for the JV.

Those who doubt the ability of the two sides to make this work tend to start out with the cultural differences. Combining a Wall Street heavyweight investment bank known for its innovation with any Japanese megabank is challenging enough. But Mitsubishi UFJ, or more specifically the Mitsubishi legacy within it, is known for conservatism even by Japanese standards. “These guys are so bureaucratic they would barely admit the name of the bank is Mitsubishi,” says Stephen Church, research partner at Japaninvest, an independent research house in Tokyo. In fact, the other article in this section shows that in syndicated lending, MUFG is actually the more daring of the three megabanks, with a far greater exposure to overseas markets. But it’s still a tough fit. “The idea of how Morgan Stanley is going to fit with Mitsubishi is just a mystery. It’s difficult enough for Mizuho and its IBJ [Industrial Bank of Japan, one of Mizuho’s legacy banks] content to operate, but for Mitsubishi, it just doesn’t make sense.”

Morgan Stanley declined to comment on cultural differences, or on internal morale. After all, do bankers who signed up for a Wall Street dynamo feel unhappy about working instead for a Japanese megabank – who, with a 60% stake, will control the venture in ownership terms? It is understood that Morgan Stanley clearly recognises that finding common ground on risk tolerance and employee expectation is among the biggest challenges that it will face, but considers it a chance worth taking in order to reach a retail base that is otherwise off-limits. It’s a choice between having 40% of someone else’s business that might have a chance of penetrating a market no other foreigners have successfully reached; and owning all of a profitable and successful, but smaller and entirely institutional, other business.

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