Credit Suisse pinpoints opportunity in Japan

"Independent firms definitely have a strong selling point but we can differentiate ourselves in a number of areas as well" Andrew Brownfield, Credit Suisse

With the Nikkei stock index apparently stuck in gradual but consistent decline, the number of IPOs down over 60% year on year, and the economy’s growth glacial rather than explosive, it would be easy to neglect Japan in favour of more headline-grabbing markets such as India and China. But the country is for now still the world’s second-biggest economy, and the attempts of global banking powerhouses such as HSBC and Citi to establish large branch networks in Japan this year suggest that it is still viewed as a land of opportunity by decision-makers at the top. Following the sub-prime crisis and the string of huge losses announced by bulge-bracket banks, market rumours suggest that many banks’ local operations in Japan might follow their European and US headquarters in announcing job cuts. If Nomura’s exit from US RMBS is anything to go by, local firms stung by sub-prime losses are also tightening their belts. For banks as yet relatively unscathed by losses from sub-prime-related securities, there is the opportunity to leapfrog more established rivals and create long-lasting Japanese franchises that will prosper if the much anticipated revival in the country’s economic fortunes finally takes place.

The strategy, as outlined by Credit Suisse’s head of investment banking, Andrew Brownfield, is to be streamlined, selective, efficient: don’t pitch for every deal, look for the maximum profitability per employee rather than league table presence or saturation coverage. There’s certainly no danger at present of Credit Suisse dominating the rankings of investment banks in Japan: Dealogic’s figures for the first nine months of 2007 show that the firm ranked ninth by volume in debt capital markets, sixth for completed deals in M&A, and outside the top 10 in equity capital markets.

"Our investment banking department has grown by about 25% per year since I moved here, to a total of 72 professionals at the moment, and we plan to grow a little more," says Brownfield. "We’re in a fortunate position at the moment since our earnings have been good compared with some of our competitors and we may be able to make some strategic personnel moves based on that."

During an interview with Brownfield at Credit Suisse’s Tokyo headquarters he mentions Goldman Sachs – the point is about his firm’s strong distribution model as opposed to the more risk-taking approach of the US bank – and Euromoney is struck over the course of interviews with the rest of his team by how often the name comes up. Goldman Sachs is widely reputed among market participants to be the most profitable investment bank per employee in Japan, and it’s clear that Brownfield and his team are more interested in that measure of success rather than awards, league table positioning or any other metric. When asked which deals the bank had been involved with in 2007 that might make good candidates for Euromoney’s Japan deals of the year, none of the bankers interviewed for the story suggested a candidate. There’s work to be done, and nowhere is this more true than in the bank’s equities department.

The primary business of equity capital markets – helping firms to raise capital as opposed to providing market access – is a strength for Credit Suisse elsewhere in the world, especially in Latin America, but here the group faces the unique problems of the Japanese market. Max Weber, deputy head of equity capital markets, explains: "Management has invested lots of resources in the secondary side of our equity franchise, and we’ve had good results for our research ranking, direct market access technology and so on. Now we need to grow our primary business."

That will be difficult in Japan, not just because the markets are slow at the moment as both foreign and local investors remain sceptical of Japanese shares. Listing on the country’s stock exchanges is seen as a slower and more complex process in Japan than elsewhere. However, the real barrier to entry is the need for a track record. "There are three main reasons why you win mandates in Japan," says Weber. "The first is ‘they are the best’: the person at the issuer responsible for the IPO looks at the league tables or recent transactions and sees your bank’s name consistently appearing. The second is ‘we’ve always used them’: you do everything for the client, treating them almost as a house account and building up a relationship. The third is ‘they were the first’: to bring new ideas to a company, which is obviously difficult to do with a straight IPO but which can be done with structured transactions, with advisory-driven offerings."

Yasuto Tsuruta, head of ECM, agrees that the paradoxical need for a track record of winning mandates in order to win mandates is the key problem the bank faces in trying to build its ECM franchise. "I am, however, optimistic about the future," he says. "We have been here three years, and it’s about time to do something. We’ve had a lot of positive feedback from the market on the work we have done so far."