Asia banking: Two cultures, one winning formula?

Chris Wright
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Morgan Stanley’s joint venture with MUFG in Japan makes sense on paper, combining international reach with domestic Japanese corporate and retail strength. But cultural differences meant few gave it much of a chance when it was announced. Six years on, it is proving the doubters wrong. How?

Illustration: Paul Daviz

Received wisdom has it that joint ventures do not work, especially in Japan. This is a place where, even 10 years after the domestic merger to create Mizuho, it is said that there is still one café used by ex-Dai-Ichi Kangyo employees and another by the ex-Fuji staff. If that is what happens in a purely domestic consolidation, what chance does a venture between the biggest of all Japanese commercial houses and the most blue-blooded of Wall Street investment banks have?

That was the prevailing wisdom when Morgan Stanley and MUFG announced their intentions to form a joint venture in the post-financial crisis uncertainty of March 2009 – by which time MUFG was a big shareholder in the US bank, having helped prevent it from going the same way as Lehman Brothers the previous year. 

It was a perception that gained strength when a baffling two-company structure was announced that November, by which time the only other comparable joint venture, between Citi and Nikko, had dissolved when Citi sold Nikko’s underwriting businesses to SMBC in October. 

But the really odd thing is it has worked. The joint venture, this "strange new hybrid animal in the Japanese zoo," as a competitor describes it, is a leader across investment banking and among the most profitable businesses in its peer group. Six years on from its formal launch, it has pulled off the unique double act of being able to access everything from Morgan Stanley’s global network to the smallest pockets of Japanese retail, and is now managing to do both on the same deal. 

It is right up there with Nomura as a Japan-based investment banking powerhouse, while still looking very much like Morgan Stanley when it needs to take clients out of or into Japan. "It is difficult to say it," says one senior rival in Tokyo. "And it is surprising too. But it is working."


The logic of a tie-up is clear; each side of the venture can do something that the other cannot

Before the financial crisis, foreign banks faced a problem: "If you looked at the structure of the Japanese securities industry revenue wallet, it was very much skewed – and still is – towards domestics," recalls Jonathan Kindred, president and CEO of Morgan Stanley Japan. "The revenue percentage shared by all the foreign firms was consistently 25% to 30%." 

Addressing the 70% to 75% on the other side was, and is, difficult because it is very hard to reach: "The reality is that about 50% of the wallet has been retail-oriented, historically and consistently. And no foreign firm has ever been successful in organically developing any kind of retail capability here, as there is a strong preference for domestic brands," says Kindred.

Foreign banks have done fine in Japan because it has always been a big market with a lot of cross-border flow, allowing for successful investment banking, sales and trading. But without the capacity to execute a retail distribution strategy, they were never going to get on to the domestic components of equity deals, which are generally the biggest pieces.


From the standpoint of the big three domestic banks there was a different problem. It has proved extremely difficult to use that domestic balance sheet heft to build a global investment banking business. As a securities firm, Nomura has tried, most obviously with its acquisition of Lehman Brothers businesses, but nobody either inside or outside that bank would pretend it has been an unqualified success. Doing it organically is even harder.

That, combined with the fact that MUFG’s stake in Morgan Stanley had put Japanese bankers on the US bank’s board and forged a necessary closeness, was the reason the two decided to build a new venture in 2009. 

"We both realized that we would get something out of it that we couldn’t do on our own," Kindred says. "There are inevitable operational views that may diverge, but as long as we stick to those high-level strategic objectives, we can come up with the right answers."

That is all fine, and neither MUFG nor Morgan Stanley are the first to notice the potential synergies. But the fact is, no one else has managed to get it to work. So why has it worked for this pair? 

The good news is that we have built so much trust across the business units. The discussion now is about new areas of business, where we can agree on what we provide our clients and how 
- Takeshi Wakamatsu, MSMS

After all, the early signs were not at all promising. If the memorandum of understanding in March 2009 to create a single-company JV was seen as a bold move, it did not help market confidence when the two sides realized that it could not be structured in that way because regulatory complications would make Morgan Stanley’s sales and trading business unable to function cohesively with the rest of the bank’s global footprint in that area. Instead they came up with a two-company structure: "That added an element of perceived complexity that further exacerbated the view that it wasn’t going to be viable," recalls Kindred.