Best Managed Companies Middle East 2014

Best Managed Companies Middle East 2014

Saudi markets get chance to shine?

Myanmar: first-mover advantage?

Myanmar: first-mover advantage?

The opening of Myanmar to the outside world

March 2012

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Foreign exchange: BTMU throws off the curse of the zombie bank

by Laurence Twelvetrees

BTMU expands FX business outside Japan; Strong yen boosts Japanese M&A flow


The term zombie bank, coined in 1987 by Ed Kane, a professor of finance at Boston College in Massachusetts, has been almost exclusively associated with the Japanese banking sector of the 1990s. That is about to change.

Today it is Europe’s banking sector that falls under the definition: an institution that "would be put to its grave by its creditors if it weren’t for the black magic of government credit support guarantees and loans", as Kane put it in 2009.

Indeed, it is widely believed that if it were not for the European Central Bank’s long-term refinancing operation, many of Europe’s banks would be insolvent.

After a lengthy period of stagnation, the tables of global finance have turned and Japan’s leading banks have emerged from their zombie stupor. They have become viable counterparties in the financial markets, which presents them with an opportunity to expand and grow business outside Japan, particularly in foreign exchange.

Akira Hoshino, Bank of Tokyo-Mitsubishi UFJ’s (BTMU) global head of FX trading, says the bank is now more focused on expanding beyond its traditional client base of Japanese corporates, driven by a more active extension of its balance sheet across Asia, the Americas and even Europe.

Overseas lending

The bank states that overseas corporate lending increased 35% in the nine months until December 31. Much of that went to high-growth regions in Asia – notably China and India – but also in Latin America and the Middle East. Since the second half of 2009, FX profits in the Asian region are up 20%.

Akira Hoshino, Bank of Tokyo-Mitsubishi UFJ’s (BTMU) global head of FX trading

 Akira Hoshino, Bank of Tokyo-Mitsubishi UFJ

"We are happy to absorb client flows from non-Japanese corporates or financial institutions and we are ready for that, having invested resources to take advantage of these new business areas," says Hoshino on one of his recent visits to London.

This has culminated in non-Japanese corporates being the fastest-growing FX client segment for BTMU, says Hoshino. It’s a reflection of renewal and a break from a vicious cycle that makes zombie status, in a financial sense of the word, so self-defeating. As Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels, recently surmised: "Zombie banks support only zombie companies."

BTMU now operates off solid foundations. The bank has steadily increased its tier 1 capital ratios from 7.76% in 2009 to 13.04% as reported in February, and its credit ratings have been unaffected by developments in Europe – Standard & Poor’s assigned BTMU’s most recent series of senior unsecured bonds an A-plus rating. This means, in contrast to its European rivals, it has less need to reduce risk-weighted assets, avoiding the slippery slope of deleveraging.

The results of this year’s Euromoney FX survey will provide a gauge as to whether or not its underlying strength and renewed global ambitions have started to translate into market share. Meanwhile, BTMU still needs to strike the balance between expansion and solidifying its home-market position.

Since 2007, it has seen the erosion of its market share by foreign banks, in particular Barclays Capital and Citi.

In 2007, BTMU commanded more than half of the market, but by 2011 that had dwindled to 14%, according to Euromoney market data.

Hoshino admits that he is dissatisfied with BTMU’s local market share, and has made efforts to allocate skilled sales traders to corporate accounts to combat this. However, it continues to dominate its two-biggest local rivals, Mizuho Financial and Sumitomo Mitsui.

He adds that corporate volumes have also been boosted from increased M&A activity as a result of the strength of the yen, which began last year at ¥82 against the dollar and then traded as low as ¥75.35. While the resulting intervention by the Bank of Japan to weaken the currency might have curtailed trading volumes, it has spurred increased cross-border M&A activity by Japanese companies.

Data from the CEIC show overseas direct investment doubled in 2011 to $109 billion, with Asia being the destination of choice. China, India, Thailand and Singapore were the biggest recipients of Japanese investment.

New appetite

Japanese banks are said to have never quite had the appetite to be truly global players, whether that was in FX or any investment banking business. Nomura has in recent years attempted to go against this trend. The bank has often been seen as too Japan-centric and too detached from its overseas operations to be effective.

Hoshino admits it has been weak in FX. Therefore, he has put in place initiatives to enhance regular communication between trading hubs, with each operation in FX reporting to him in Tokyo.

However, Hoshino is fully aware that BTMU’s ambition will be nipped in the bud if the bank doesn’t produce a viable electronic trading platform. "Investment in our e-trading platform is a core area in which a lot of our energies and resources are being placed," he says.

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