Asia’s GFC Deals 10 Years On – So Who Won?

Euromoney, September 24 2018

The global financial crisis, despite its weighty worldwide name, was really a crisis of US and European financial institutions. Asia was just the place that supplied the capital to save them.

First it was the sovereign wealth funds – China Investment Corporation (CIC) into Morgan Stanley, GIC (Singapore) into UBS and Citigroup, Temasek into Merrill Lynch and Barclays, Korea Investment Corporation (KIC) into Merrill – and then it was the Japanese banks.

We are now at the 10th anniversary of MUFG resuscitating Morgan Stanley by writing a cheque for $9 billion and Nomura buying the Asian and European assets of Lehman. It is fair to say, looking back, that one of those deals has fared rather better than the other.

Euromoney has been talking to Nobuyuki Hirano, president and group chief executive of MUFG, and Morgan Stanley chief executive James Gorman on how their alliance has worked out.

We can summarize it did the following things: stopped Morgan Stanley going under; provided an extremely welcome boost to MUFG’s profits consistently over the last 10 years; proved a useful investment (Morgan Stanley’s share price doubled from the struck price in 2008 and MUFG also got perpetual convertible preferred stock with a 10% dividend); and spawned a strikingly successful securities joint venture in Japan.

Nomura? Not so good. Its international division made seven consecutive years of losses before turning profitable in financial 2016, following its decision to bite the bullet and close its European cash equities business that year. But in the first quarter of 2018, with a truly miserable result across the bank as a whole, it was back in international losses again.

However, things can still turn out to be positive given sufficient time. For evidence, look at KIC, whose $2 billion investment in Merrill Lynch in 2008 (part of $6.6 billion in preferred stock sold to it, the Kuwait Investment Authority and Mizuho) was seen as an utter disaster and a national embarrassment for years and led to frequent interrogations of the sovereign wealth fund executives in parliament. It now appears that KIC sold the whole lot in 2017, having made a profit.

CIC also faced a great deal of pressure in China as its stakes in BlackRock and Morgan Stanley sank through the financial crisis. But these holdings eventually recovered – although it appears CIC, chastened, sold out once it had got its money back. Most of its BlackRock stake was sold by 2012, when the share price was around the level it bought in at; and CIC no longer appears on Morgan Stanley’s list of biggest shareholders and is believed to have sold out gradually and quietly around the same time.

Temasek had a different strategy. On paper it did worse than anyone out of its financial crisis investments, having tried to catch a falling knife with its Merrill and Barclays investments and then sold out again when they were still low. However, one has to consider what it then did with the money. Much of it went into China Construction Bank, which has proved a successful and well-positioned investment. Besides, what Temasek learned from its financial crisis experience has informed it ever since: it no longer holds any stakes in US-listed banks (holdings in Morgan Stanley and Goldman Sachs were the last to go) and instead accepts its great expertise is in Asia, where it is a successful and sophisticated investor.

GIC’s investment in UBS, through mandatory convertibles, is tricky to assess accurately but it certainly made a loss when it sold 93 million shares in 2017 – some say as much as $4 billion. But it is believed its investment in Citigroup has eventually been positive in mark-to-market terms.

None of this tells us whether Nomura will ever get its Lehman acquisition right, because unlike all the others, most of which were strategic investments designed to do nothing else but make good money, the Lehman deal was supposed to transform the bank strategically. Then chief executive Kenichi Watanabe said it would: “Deliver the scale and scope to realize our vision to be a world-class investment bank.”

In Asia ex-Japan, according to Dealogic, if one combines 2017 with year to date 2018, Nomura ranks 53rd in DCM volume, 52nd in ECM, 23rd in M&A and 49th in investment banking fees. Even allowing for the fact that league tables are now dominated by mainland Chinese houses, that’s not world class.

To be fair, it’s not like Nomura spent billions on the initial acquisition. The rumour at the time was that it paid $2 for the European equity and advisory business, and the same for the fixed income divisions in the region. But surely, of everyone in Asia that tried, Nomura got the least out of its crisis-era opportunism.

McKinsey report

What has changed in the intervening years in Asia? A new McKinsey report marking the financial crisis anniversary notes that the expansion overseas of Chinese banks is one of the biggest shifts in financial services in the past 10 years. They have more than $1 trillion in foreign assets now, McKinsey notes, compared with virtually nothing a decade ago.

But McKinsey, which is generally positive about changes in the global financial system, also puts China front and centre in terms of new risks.  Although China is managing its debt burden, the consultancy says there are three areas to watch: first that half of the debt of households, non-financial corporations and governments is associated with real estate; second that local government financial vehicles have borrowed heavily to fund low-return infrastructure and social housing projects; and third that a quarter of outstanding debt in China is still provided by opaque shadow banking.

“The combination of an overextended property sector and the unsustainable finances of local governments could eventually combust,” McKinsey says, leading to a wave of loan defaults which could damage the banking system.

Everyone knows this risk and the pat response is to say that China’s government can simply bail out the financial sector at any time. But if the last financial crisis taught us anything, it is that just because everyone says everything is OK, it doesn’t mean they’re right.

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