Can Japan’s megabanks ignore the devil's whisper?

Teisuke Kitayama SMBC, Terunobu Maeda Mizuho and Nobuo Kuroyanagi MUFG

Tanaka translates: "Suddenly the whole world seems to be having a party, and Japan was the only country not invited."

For once this lack of involvement is cause for celebration: it might be more through conservative management than brilliant foresight that the Japanese banks have escaped the worst of the sub-prime crisis but they nonetheless find themselves in a strong position for the first time in more than a decade. Like a group of lost speleologists emerging after years underground, they have come blinking into the daylight to find a world that is much changed. Once-strong Wall Street names are shedding their superstar bosses as the scale of their own bad investments becomes clear; meanwhile the Japanese banks were underground patiently looking for a way out and more or less missed the whole fiasco.

As if on cue, Mizuho Corporate bank, itself the grateful recipient of overseas aid during the so-called ‘lost decade’ when Japanese banks almost collapsed under the weight of their bad debts and bloated bodies, announced on January 15 that it is investing $1.2 billion in Merrill Lynch. The once-proud bull has suffered more than many in recent months, and it came to Japan, among other countries, for cash. Finally rid of the worst of their non-performing loans and relatively flush with capital to be put to work, the megabanks look ready to try becoming true global players, just as everyone thought they would back in the booming 1980s. But have they really put the past behind them? Can these weariest of old dogs learn new tricks? Do they even want to, seeing what a mess certain clever schemes have made of financial markets in the past few months? Do they want to take on the whole world, or just a part of it?

Reading between the lines of Merrill Lynch and Mizuho’s press releases and talking to Mizuho’s management, it’s clear that while the Japanese firm would welcome Merrill’s help in growing its US business, no firm agreement has been reached. It’s also worth bearing in mind that Merrill Lynch has a prior engagement with a rival bank that might make it unwilling to favour Mizuho: a private banking joint venture in Japan with Mitsubishi UFJ. Hidetake Nakamura, head of Mizuho Corporate Bank’s international unit, says that Mizuho and Merrill have "no strategic agreement, but it’s understood by both parties that we’d like to increase collaboration in the future and I look forward to finding areas where we can work together".

Analysts and Nakamura’s counterparts at the other megabanks agree that an official tie-up is unlikely given the two firms’ differing business cultures, the fact that Mizuho’s investment does not give it any substantial voting rights, and the small size of the sum in relation to Merrill’s total market value. The real value of the investment is purely financial: the preferred shares will yield a juicy 9%.

"Our focus is Asia, although we’re also looking at the Middle East and Europe" Teisuke Kitayama, SMFG

Nobuo Kuroyanagi, president and chief executive of MUFG, says that his bank was approached but decided not to participate.

"We have enough capital now to make any investments we’d like to make," he says. "But when we’re deciding whether to participate or not in a given deal the main concern is the likely effectiveness of that investment. Furthermore, we have a subsidiary in the US when our competitors don’t, so our strategies are likely to differ."

Sufficient capital there certainly is: the gap between Citi’s market capitalization and MUFG’s has narrowed from ¥12 trillion to ¥3 trillion ($27.7 billion), according to Kuroyanagi, giving weight to his claim in a press interview in 2006 that the then newly created Mitsubishi UFJ would one day rival Citigroup as a global player. The sheer size of the megabanks makes them potential contenders for such a role, but they have always struggled outside Japan and have been hindered, in the eyes of many, by an innate conservatism and a passive style of management that hinders dynamic growth.

The US does not seem to be the first priority: striking and symbolic it might have been, but Mizuho’s investment in Merrill might prove to be misleading for anyone looking to predict how the megabanks will seek to profit from their new-found position of strength. North America has historically been something of a graveyard for failed Japanese banking ventures, with Nomura’s recent exit from the RMBS business there the latest in a progression of aborted attempts to establish a long-lasting presence.

Asian focus

"Look what happened to Nomura in America," says Yuri Yoshida, a director at Standard & Poor’s in Tokyo. "They were among Japanese financial institutions the most deeply involved in the US, and when things went wrong there they took a huge Q2 hit to their results and exited the whole market. As for the megabanks, they are still probably holding on to some hard-to-liquidate assets related to sub-prime problems. However, the amounts are small relative to their total capital. Regardless, on a strategic level the number one lesson they should take is that they probably shouldn’t go into the US market now. The big players already there are too strong."