Mizuho Corporate Bank and its German subsidiary have together bought a Russian bank, Michinoku Bank (Moscow), completing the purchase of 100% of all 10 million outstanding shares on January 21. The move might turn out to have much further-reaching consequences than the Japanese bank’s higher-profile purchase of a stake in Merrill Lynch earlier in the month. The acquisition of a small stake in a Wall Street bank looks like a purely financial investment of spare capital, whereas the Russian adventure indicates the increasing desire of Japan’s largest commercial banks to seek profits overseas, as the domestic markets offer little joy.
A Tokyo-based M&A banker at a bulge-bracket firm sums up market perception of Mizuho’s $1.2 billion investment in Merrill Lynch. "Now is a good time to invest in a Wall Street Securities house, and from a purely financial perspective it makes sense for a relatively cash-rich Japanese firm to take a stake in an investment bank with potentially huge return on equity that’s going through a tough spot. So, it’s a reasonable idea financially. Is it a meaningful investment from a relationship perspective? No. As a percentage of Merrill Lynch the investment is small, and Merrill has a relationship with another mega bank in the form of a private banking joint venture with Mitsubishi UFJ, so they can hardly start favouring Mizuho heavily."
Contrast this with the complete acquisition of a Russian bank, which Mizuho Corporate Bank says it will use to help serve Japanese clients looking to capitalize on Russia’s growth. Success in this venture, and in Japan-related corporate finance across Asia, could be the key to restoring profitability to the perennially underperforming Japanese financial groups.
Fiscal 2007 had a sorry first half in Japan: total mid-term net profits at the big banks were down 45% compared with the same period in 2006, and even comparatively small write-downs from sub-prime loan-related securities still hurt overall profitability. Hiroshi Hosoda, chief banking analyst at Rating and Investment Information, says that Asia offers an opportunity for Japanese banks looking to diversify their businesses, which are over-reliant on the dwindling domestic loan markets.
"Japanese corporations are increasingly active in Asia, so that’s a way in to a fast-growing region for the mega banks and their subsidiaries," he says. "The Japanese banks currently have a surplus of capital and need to find ways to increase profitability; leveraging their strong relationships with Japanese corporates globally would be a good way to do that. There’s a long way to go though, and right now it would be tough to say that any one of the mega banks is ahead of the others in Asia. "