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.

]]> http://www.chriswrightmedia.com/securities-japan-for-euromoney/feed/ 0 http://www.chriswrightmedia.com/loans-japan-for-euromoney/ http://www.chriswrightmedia.com/loans-japan-for-euromoney/#comments Mon, 01 Jun 2009 04:06:02 +0000 Chris Wright http://www.chriswrightmedia.com/?p=64 Euromoney June 2008

League tables haven’t looked like this since the 1980s. Rankings for global loan arrangers in the first quarter of 2009, compiled by Dealogic, show three Japanese banks in the top five worldwide – with Mizuho at the top. The trinity of Mizuho, Sumitomo Mitsui Banking Corp and Mitsubishi UFJ Financial Group between them led almost exactly half of the 1,453 loans Dealogic tracked worldwide in that three-month period.

This is partly because of an absence of activity at American and European banks rather than an increase at the Japanese. But it’s still very notable that volumes for the Japanese banks have held up so well. In fact, in some cases they’ve done better than hold up: during the October to December quarter, in arguably the worst climate for global finance in history, Japanese deal volumes went up more than 50% compared to the same quarter in 2007. In the first quarter of 2009, they were down year-on-year for the industry as a whole, but at two of the three megabanks – which account for 90% of the market in Japan – their volumes actually went up.

It’s tempting to think that this shows Japanese banks stepping into the void internationally left by western lenders, but the truth is this is predominantly a story about Japanese borrowing. According to data from ThomsonReuters, 93% of Sumitomo Mitsui Financial Group’s loan proceeds in the second half of the 2008 financial year were in Japan, and 99% of Mizuho’s.

Partly, the strength of domestic activity is a consequence of the closing of Japan’s bond markets to lower rated credits. “Single A companies have seen their bond issuance reduced,” says Mayuko Suzuki in the syndication department of Sumitomo Mitsui. “Therefore they want to arrange more syndicated loans.”
At the same time, the domestic Japanese institutions who typically participate in syndicated loans were not badly hit by sub-prime and their lending appetite did not drop anything like as drastically as elsewhere. “Japanese regional banks, who are the main buyers for the loans, were not significantly damaged and are relatively strong in their capacity to lend,” explains Sadahiro Sato, general manager of the syndicated finance division at Bank of Tokyo-Mitsubishi UFJ, part of Mitsubishi UFJ Financial Group. “Also, Japanese individuals have shifted from investment trusts and stocks to deposits. That means regional banks’ total deposits have increased and they have been looking for a way to invest that.”

They’re still happy enough to take part in lower rated credits. “Of course there are many terms and conditions,” says Takashi Tadokoro, senior vice president in Sumitomo Mitsui’s syndication department. “But we do not have any difficulty in placing or selling loans to investors.”