No turning back for Japanese banks
Yutaka Matsumoto brought an unusual memento back from the Philippines to his office at Bank of Tokyo-Mitsubishi (BoT-M) in early July: the original press release announcing the effective devaluation of the peso, signed in red ink by president Fidel Ramos of the Philippines.
Matsumoto, general manager of BoT-M’s Asia and Oceania division was present at an economic briefing given by Ramos. The announcement interrupted proceedings, and Matsumoto acquired his souvenir.
A week later Matsumoto was in Tokyo. He and representatives of 21 other Japanese financial institutions were spending time with another group of senior officials. Currency was again on the agenda. The steady slide in the value of the baht had prompted Thai finance minister Thanong Bidaya and foreign minister Prachuab Chaiyasan to seek help in rebuilding foreign reserves.
After years of relative stability (against the US dollar if not the yen) the sudden weakness in the currencies of most south-east Asian countries is having an important impact on many Japanese financial institutions.
“Most Japanese banks have been expanding their business exposure to Asia,” says Shunsuke Kanzawa, deputy general manager, international planning, at Sumitomo Bank. The expansion marks a move on the part of Japanese institutions away from Europe and the US. This has been partly prompted by the search for better margins. Also many of their industrial customers have shifted operations into south-east Asia, where labour is cheap. The banks have followed their clients.
Kanzawa expects the recent currency shocks will occasion a pause in the expansion of Japanese assets in Asia. “This point in time may be comparable to the sovereign debt crisis in Mexico in 1982 and its effects on North American banks,” says Kanzawa. “I hope it will be less serious, but as a businessman I have to expect an adjustment.” He reveals that the bank has not yet changed course, but is likely to take its foot off the accelerator and “poise it over the brake”.
If other Japanese banks share these views, they are not saying so. Far from discouraging the continuing expansion (in terms of both staff and capital) of Japanese banks in Asian markets, the summer’s currency crisis is most likely to lead to an increasing engagement, they say. “I hope there will be a slowdown, but I don’t expect one,” says BoT-M’s Matsumoto. “All Japanese banks have been shifting human resources from the US and Europe to Asia. I doubt they will be able to readjust this shift.”
Matsumoto believes Japan’s involvement in Asia must instead increase as a result of demographics. The huge populations of Asian countries are driving Japan’s corporations to the region in search of both markets and labour. “Our bank’s duty is to support these Japanese companies setting up operations,” he says. And in doing so, other opportunities arise, Matsumoto believes. “In order to provide these services you have to have very good local knowledge, and that in turn can help you build up local business.”
Banks make good money in Asia, and concentrating on the region is in line with their present policy of building profitability rather than just market share. “Asia is our most important profit centre outside Japan,” says Sanwa’s general manager for Asia and Oceania, Masateru Nakamura. “It also has a higher return on assets than Japan.”
New business opportunities are likely to emerge as the region’s currency markets evolve. BoT-M’s Matsumoto believes there will eventually be trading opportunities in Asia’s newly-floating currencies as restrictions are lifted. In the meantime he notes that margins can often be better in more regulated markets.
Japan’s links with Thailand are strong. Japanese banks are estimated to have lent or arranged the financing for at least half the country’s $70 billion of foreign debt. Nevertheless, the Japanese government’s decision to take a leading role in Thailand’s international bail-out seems to go a step further. It may in future years be seen as the beginning of a Japanese interventionist approach to its nearest neighbours.
After the initial collapse, it was expected that the Japanese authorities would adopt a similar line to that taken by the US government during the Mexican peso crisis. However, both before and after the Thai officials’ visit to Japan in mid-July, spokesmen for both countries were playing down the likelihood of a Japanese-led rescue deal. Sources close to the talks suggested that, at that stage at least, the Thais carefully avoided asking for, and the Japanese carefully avoided offering, assistance.
It was no surprise, though, when Japanese official lenders ended up contributing $4 billion of the $16 billion loan package put together by the IMF in mid-August. The man who signed off on the package was Shigemitsu Sugisaki, Japan’s nominee as deputy managing director at the IMF.
The signing took place in the presence of regional finance officials and central bankers from most other Asian countries, summoned there presumably to be told the meaning of the new financial Pax Japonica.
Although Japan had called on the G7 countries and Australia to assist in the Thai rescue package, the package was an almost purely regional one, with Australia’s $1 billion swap facility the only direct contribution from an OECD country other than Japan.
At the micro level, the currency crisis in Thailand and elsewhere in Asia has prompted many Japanese banks to review their lending. “In terms of our bank the devaluation may effect our credit exposures,” says Sumitomo’s Kanzawa. “Some [loan] restructuring is probable in my present opinion.”
However, Japanese banks have mostly been spared the direct effects of the devaluations in Asia as most of their loan exposures are in US dollars. For once the regulators and their barriers to entry have done foreigners a favour by inhibiting domestic currency lending in so many markets. Even in countries where such lending was permitted, such as the Philippines, says Michiharu Kambe, general manager of Fuji Bank’s Asia and Oceania division, his organization had not made that many peso advances.
Most of the Japanese banks have a second level of insulation from the immediate effects of the devaluation in Thailand. In general the borrowers they have serviced are subsidiaries, affiliates, or joint-venture partners of long-standing domestic Japanese clients. “We are mostly following our customers from Japan,” says Kambe. As he admits, this is partly to protect the relationships with the customers back in Japan. In some cases the move overseas is the only business from corporate clients that will be available in future, he says, as some manufacturers are virtually ceasing operations in the home market.
Where Fuji has lent to Japanese companies’ Thai joint ventures or affiliates, Kambe believes their position will probably be strengthened rather than weakened by the devaluation because of their ability to improve their competitiveness and lift exports.
BoT-M’s Matsumoto agrees. “Many companies [which have borrowed in US dollars] will have suffered from the depreciation of the baht,” he says, but adds that he expects exporters to be compensated by increased sales.
Japanese banks claim to have restricted their lending to indigenous Thai companies to blue-chip clients. Sanwa’s Nakamura says, for example, that his bank has lent to a few big local companies like Siam Cement. “They are now suffering from the impact of the currency, but they are all very big and can service [the loans],” he says.
Nakamura says Sanwa has no intention of trying to acquire any of the suspended finance companies or weak banks in Thailand. However, he does expect growth opportunities for the company’s 35%-owned Siam Commercial Finance (SCF), which lends to medium-size listed companies. Sanwa has not yet decided whether to take advantage of the recent change in regulations and increase its stake in SCF to 60%.
This optimistic view of the immediate fall-out from the currency crisis is shared by many analysts covering the banking sector in Tokyo. HSBC James Capel analyst Brian Waterhouse confirms that his research shows most exposure to Asian corporates is in US dollars to Japanese affiliates. He is also confident the Japanese banks have managed to minimize their exposure to property and infrastructure developments.
Japanese banks continue to increase their representation in the area. “Network expansion is the most important for us at the moment,” says Fuji’s Kambe. “Presence is a very abstract concept, but we want to be the strongest bank in Asia.”
Fuji’s strategy in the past has been to cover other Asian markets from its branches in Singapore and Hong Kong. This has changed. In 1996 alone it opened new branches in Hanoi and Mumbai (Bombay) and a representative office in Nanjing. Kambe admits this is a deliberate policy of trying to catch up with rivals Sakura and Sanwa. “We are trying to get into virgin territories where other companies may not have a presence.” Fuji is considering entering into a joint venture in Burma and opening branches in Bangkok and Australia. “For the time being that will be the end of the network expansion,” says Kambe. “The next stage is to work out how to deliver products effectively.”
Kambe also predicts that the lending mix will change. “We see an increasing number of project finance loans,” he says. “This portfolio now exceeds sovereign loans.”
BoT-M has had a more pressing task on hand: melding the two companies’ networks. “Rationalization overseas started much faster than domestically and was almost immediate except where there were foreign regulatory issues,” says BoT-M’s Matsumoto. “There were a lot of small difficulties, but overall the result has been quite satisfying.” He believes the merger has done little to undermine one of BoT’s traditional strengths: its perceived neutrality among the large keiretsu groups, allowing it to offer services to a wider section of corporate Japan than most other banks. “Initially some corporations worried that the new bank’s attitude would change. Now they understand that this is a nonsense worry.”
Part of the reason for this, says Matsumoto, is that outside Japan, such “group” thinking is weaker anyway. This can sometimes be used as a way to bring these relationships back to Japan later, he says. “Competition is fierce among Japanese banks,” agrees Sanwa’s Nakamura.
The Japanese have adopted various organizational approaches to Asia. Fuji, for example, has chosen to keep its regional headquarters in Tokyo rather than moving to either Singapore or Hong Kong (or both) as other banks have done. However, Fuji is still using Singapore as a base for key staff with certain product skills.
Sumitomo, by contrast, has no formal Asian department, but has run the region from Hong Kong. This is about to change, says Kanzawa, as Hong Kong is placed within the purview of the bank’s China department, and the regional headquarters moved to Singapore. The move will coincide with the relocation of regional credit officers to Hong Kong and Singapore (where local currency business will be concentrated). Kanzawa hopes the reorganization will improve inter-network flows.
Some Japanese banks have chosen to include China in their Asia departments. Others have created separate China divisions.
“Business concerns in China are rather different from other Asian countries,” says Nakamura of Sanwa Bank, which has decided to treat China as a market on its own. Sanwa’s extensive network within China includes full branches in Shanghai, Dalian and Shenzhen; a sub-branch in Shanghai’s fast-growing Pudong district; and representative offices in Tianjin, Beijing and Guangzhou. New offices will open soon in Chongqing and Suzhou. The task now will be to expand the range of business done. “Our main business in China is lending and leasing,” says Nakamura. In addition, Sanwa is able to make renminbi advances to Japanese customers from its Shanghai branch, and is likely to expand its successful Asian project finance business in the country.
BoT-M, in contrast, which has long had a presence in China and has done substantial business there, opts for an integrated department. Chinese operations are part of its Asia and Oceania division.
The aim of Industrial Bank of Japan (IBJ) is to move its Chinese business beyond lending to fee-earning work like introducing joint-venture partners. “We have had a long relationship with mainland China,” says managing director Shinji Kubo. “Big Japanese corporations trust our information.”
More generally, Kubo sees infrastructure lending to Asia as still in the early stages of development. “The focus used to be on natural resources and transportation. Now it includes telecommunications, subways, trains, airports and electricity,” he says. IBJ also aims to provide more investment banking services.
There are also signs that the Japanese institutions will try to compete with banks like HSBC and Standard Chartered by offering trade and other services to intra-Asian, non Japanese clients.
“Trying to use our network for intra-Asian business is one of my very important jobs,” says Sanwa’s Nakamura. In Hong Kong, he believes Sanwa already competes for the kind of business that the British-owned banks regard as their stock-in-trade. “The focus is on local customers, particularly overseas Chinese,” he says.
Some Japanese bankers say this is a more long-term ambition. “You can’t just copy [those banks]; their style and philosophy is very different,” says Kambe of Fuji Bank. However, he believes opportunities for this kind of business will flow from the bank’s core Japanese corporate client base. “Our customers are seeing Asia as a single region, with manufacturing in multiple countries. We would like to capture this business between Asian capitals.”
Kambe says Fuji has specifically earmarked trade finance as a growth opportunity. To this end the bank has set up a special operations centre in Hong Kong to handle the regional back-office work expected to result.
With a few exceptions, Japanese banks have either chosen not to create retail networks in Asia, or have been prohibited from doing so. “Because of our infrastructure, we are not ready to go into retail operations, but that does not mean that we rule out growing this kind of business,” says BoT-M’s Matsumoto. “However, for the time being our targets will be limited to Japanese individuals.”
Though they are generally cautious about retail business, Japanese banks make an exception for Hong Kong, where both Sanwa and Fuji have substantial operations. Hong Kong’s Kwong On Bank, in which Fuji has a 51% stake, has 33 branches and focuses mainly on mortgage lending.
Sanwa Bank opened its first branch in what is now the Special Administrative Region in 1964. It is one of the few Japanese banks to have a substantial wholly owned sub-branch network in Hong Kong and intends to expand the number of branches further, says Nakamura.
Sanwa’s business strategy is to be a full service operator, with commercial lending, investment banking, and a substantial mortgage book, which Nakamura describes as “very profitable”. Besides its established policy of cultivating local middle-class customers, Sanwa has some big names among its customers. Nakamura, who himself worked in Hong Kong from 1984 to 1989, is proud to claim Li Ka Shing and Sun Hung Kai as bank clients. “Almost all the big groups are our customers,” adds Nakamura.
Sanwa also stands out from its competitors in the range of retail and local currency operations in which it has interests. These include Bank Bali in Indonesia, with which it has joint-venture bank and leasing company operations; Bank of Commerce in Malaysia; the Siam Commercial Bank; and the Rizal Commercial Bank in the Philippines, in which it has a 25% stake.
To date, Japanese bankers say Hong Kong’s reversion to China has had no effect on business. While they don’t believe things will necessarily be the same in two years’ time, few bankers show much alarm, predicting a process of gradual integration with China. Some Japanese bankers are also keen to ensure that they remain intimately engaged in the evolution of the former colony. “About 40% of the assets on the lending side are from Japanese banks,” says Fuji’s Kambe. “We can’t just be an observer. We have to be an active protector of Hong Kong’s future.”
“The hand-over doesn’t alter business opportunities,” says Sanwa’s Nakamura. “There are still many big projects. We also expect to be doing more business with China-related companies.” And Nakamura is confident about the residential property market in Hong Kong. He still believes demand is strong. However, the bank has decided to limit business in this sector to owner-occupiers.
Shape up or ship out
Hong Kong’s Japanese broking business is muscling up to take on US and European competitors and is going through a process of rationalization and redirection. By Gill Baker
Japanese brokers and bankers are having a tough time in Asia this year. The Nomura and Yamaichi scandals and the disruption in the Thai and Korean markets have concentrated the minds of Japanese brokers in Hong Kong, and may bring new dynamism from leaner, fitter and wiser houses.
The big four brokers – Nomura, Nikko, Daiwa and Yamaichi – and the securities arms of the banks recognize they have got to shape up or ship out. The problem is familiar – too many players chasing a diminishing number of attractive deals. But the Japanese are determined not to be left standing by the US and European powerhouses.
There is fighting talk from Daiwa Securities (HK) managing director Osamu Semba, who is starting to see the effects of Tokyo’s Big Bang: “Going global means we are going to fight not only the other Japanese securities houses but also the Americans and Europeans. I don’t think we can fight with Merrill Lynch or Morgan Stanley in the US because it is their home market, but there are some areas where we can fight. In Europe we founded our operations quite a long time ago so there is a chance, but to fight there we need more money and more people.”
Daiwa employs 183 people in Hong Kong, mainly in equity and investment banking, but Semba aims to double that, and his 100-strong Singapore complement, which handles the fixed income business. “Daiwa is not so profitable in Asia,” he admits. “We are making a profit, but not enough.” In August Semba was due to discuss increasing the scale of the company’s investment banking business in Asia through a unification with European operations, creating a single investment banking division covering both regions. Four specialist corporate finance teams – telecoms, power, oil and gas and transport – are being created to straddle Europe and Asia and to chase financial advisory and M&A mandates.
In June, Daiwa’s equity capital markets group was unified between London and Hong Kong, giving Semba access to London’s capital resources and vice versa. There are plans to link all the company’s non-Japanese hubs, by bringing the New York businesses under the same global equity capital markets structure, handling everything but Japanese equities. A similar structure is being developed in investment banking.
Nomura is also revamping its non-Japan equities businesses, and easing away from centralized Tokyo control. Nomura International (Hong Kong)’s head of Asian equities Yoshinori Go has been reorganizing in Asia since June and is now recruiting. “Nomura is everything as far as the securities business in Japan is concerned. In Asia we are not a broker like Jardine Fleming or ING Barings. Their coverage is much bigger than Nomura’s in terms of countries, but Nomura would really like to be a JF or an ING Barings,” says Go. “We have a very solid client base of institutional and retail clients and the firm is now trying to synergize its Asia business with the expertise in Japan.”
Nomura’s Asian equities business profits fell in the fiscal year ending March but Go insists the turnaround since April is due to the reorganization. He does not underestimate the threat of competition. “Even in the Asian equities business there are so many competitors. The local brokers are growing up very fast because they are very strong in the primary business and have strong relationships with the Chinese companies.”
Takeshi Sakuma, managing director of capital markets at Nikko Securities (Asia), has restructured the company’s capital markets activity in Asia in his two years in the job. It used to have an independent corporate finance function handling small Hong Kong IPOs of $10 million or less and offering advisory services, and an independent syndication section. He has reshuffled the region outside Japan, as far as India and incorporating Oceania. Capital markets now covers equities, convertibles and fixed income. The strategy is to chase medium-sized deals in the $50 million-$100 million range. “They are not that spectacular, but it is a very good starting point,” he says. The new focus is designed to make the operation more profitable this year.
Daiwa’s Semba insists restructuring must be accompanied by investment. “In Tokyo we have an advantage. The retail sector has to change dramatically because of the Big Bang and it is still a strong base, whereas we don’t have so much of a strong base in foreign countries.”
Tokyo Daiwa has capital of around $10 billion, against the Hong Kong company’s $140 million. Previously Daiwa in Hong Kong was perceived as a single-product company specializing in Japanese equities. “We founded the office in Hong Kong to sell Japanese equities to the region and, until the bubble burst, it was quite good business. But the business changed quite rapidly and we are now concentrating on Asian equities, derivatives and investment banking. In the future I think it might be bond business. A huge number of issuers need money in the region,” says Semba.
While the big four brokers still dominate the scene, the Japanese banks’ securities arms are spotting the cracks in the giants’ armour and carving themselves a niche. Like other bank broking arms, IBJ Asia has seen a certain amount of business from clients reluctant to deal with Nomura or Dai-Ichi Kangyo Bank, but it expects this to be short term. “We cannot overlook the strength of Nomura and DKB in the long term and people will be careful not to make a similar mistake,” says Tadashi Yoshida, IBJ Asia managing director and chief executive.
Like Nomura, IBJ Asia has been working closely with its London sister company, IBJ International, on global transactions, and was concentrating on dragon and Hong Kong dollar issues until the market turned down. “Since last year, the environment has changed quite drastically. The situation surrounding Japanese banks has changed and they are facing a very difficult time at the moment,” he says.
The region’s changing fortunes have prompted searches for alternative sources of deals. “From the beginning of this year we have put more emphasis on trying to do the so-called Asian deals, with more emphasis on Asian corporate names rather than sovereigns,” says Yoshida. But selling Asian corporates in Japan is an uphill struggle, and the Japanese portion of any take-up tends to be merely the icing on the cake in many deals.
“Even in Japan investors are slow to understand these Asian credits and we are still trying to educate them. Being a Japanese bank subsidiary we do not have the experience to deal with the equities side so the only thing we can do for the time being is the convertible bond area,” Yoshida admits. However, he is confident this will change in the next few years as the bank takes advantage of Big Bang to do equity business in Japan.
“We don’t have the distribution network or the investor base that would accept these things yet. It takes a bit more time,” he concedes. “We have to educate our people back in Tokyo and the people in Tokyo need to look at themselves as being Asian and know Asia better.”
With Big Bang IBJ in Tokyo could restructure into a holding company overseeing four core areas – investment banking, corporate finance, investment management and market-oriented areas – and a department has been established to review the possibilities. A link-up with a foreign house is also talked about.
Yoshida is pragmatic about IBJ’s limitations in Asia. “If the amount is large an American investment bank will suggest a yankee. We cannot compete. The only thing we can do is provide ideas and if the amount is up to $100 million-$150 million there is a good chance to do that. Many of the other institutions will be doing the same thing, however, so it is not that easy to differentiate ourselves. Of course our aim is to compete with the larger banks, but it is not that easy.”
He says Japanese institutions are still conservative towards Asian names. “Maybe some China-related, Taiwan or Hong Kong issues can be sold, but that’s the only area investors might feel more confident in at the moment.” Japanese investors remain cautious of long-term paper, so deals have to be structured with that in mind, Yoshida says.
Deals are won on an individual basis, and this is where IBJ believes it could have an edge: “Being a very small institution here our sales and origination side are more or less together,” he explains. IBJ in Hong Kong acts as a selling agent for global issues originated by IBJ International in London, which tend to be G7 country issues, but the margins are low and the deals are not particularly profitable, according to Yoshida.
LTCB Asia’s managing director and CEO Shunji Nishida says: “After Big Bang we can expect more flow to Asia from Japan because investors in Japan will have more choice, so maybe they will invest overseas more. Big Bang will accelerate that.”
The sentiment is echoed by Daiwa’s Semba. “We have a strong client base in Japan, but if we want to promote Asian equities to Tokyo there are many barriers legally and procedurally. But Big Bang means these barriers are getting lower and lower. If Big Bang had happened five years ago Tokyo could have been the finance centre of Asia. Now I think it is too late, but we can still match the Asian markets.”
Other Japanese brokers in Hong Kong say they are not expecting any great impact from Tokyo’s liberalization on their businesses, and they play down the threat from the bank securities arms. However, some admit privately that a strengthening of securities business by the banks back home could give the banks an added boost overseas.
As the effects of Big Bank emerge, the brokers might also step into banking business, by structuring a Japanese holding company in two divisions. Current restrictions on that look likely to be lifted soon. Another alternative for the future are tie-ups similar to that planned between LTCB and SBC Warburg, or between Japanese firms themselves.
LTCB’s Nishida thinks the primary market niche to be in is FRNs and FRCDs, and with the trend towards Asian issuers opting for yankees and Eurobonds rather than dragon bonds, LTCB is also concentrating on the secondary market.
But after a relatively busy year last year, market conditions have deteriorated this year, due mainly to the Thai economic problems and the south-east Asian currency crisis.
The shift among Asian issuers to diversifying funding methods accelerated in 1993 and continued to expand in the next three years, making 1996 a boom year for FRNs, exceeding the samurai market. Asian FRN issues hit $10.9 billion in 1994 from 97 issuers, fell to $10.1 billion in 1995 from 130 issuers and dropped heavily the following year to $8.9 billion from 105 issuers. In the first quarter of this year there were 19 issuers and $2.4 billion of paper.
For those Asian issuers which raised funds on the capital markets the Asian bond market has now become a reliable funding source and among the serious choices. The Asian market accounts for around a third of funds raised, Euros 30%, yankees 15% to 20% and samurais 10 to 15%, according to LTCB.
The absolute size of the Asian bond market is getting large, says Nishida, and the US and European securities houses have expanded their Asian teams in the past few years. Secondary trading volume also expanded during 1995 and 1996, and as liquidity improved, more brokers joined the market.
On the primary side for FRNs things are not rosy, with new issues from Thailand a non-starter and Korean issuers having to shorten maturities and pay a premium to get issues away. There are also signs of second-tier Asian issuers enhancing their credit with bank guarantees, says Nishida. In other Asian countries investors are focusing on corporate issuers to enhance their returns, resulting in tightening spreads in countries such as Indonesia, where Bank Negara Indonesia’s benchmark FRN, due 2002-2005, has tightened by 6 basis points to around 72 basis points over Libor in recent months. In comparison, Bangkok Bank’s FRCD, due 2001-2003, widened from around 33 basis points to 40 basis points between March and May. There was $20 billion of new FRNs and FRCDs issued by Asian issuers last year, but fixed-income dragon bonds are fading out, says Nishida.
“The Asian market is still in the process of developing so investors who have an appetite towards fixed income are very limited. Central banks who can invest reserves into fixed income buy and sell from time to time, but their internal restrictions are very rigid,” he says.
Taiwanese and Korean insurance companies have a limited appetite, but they prefer to invest in their domestic currencies. Asian pensions funds are also likely to be candidates for investment in the region, but availability is limited, with even Hong Kong not expected to launch its mandatory provident fund until next year. Nishida claims LTCB is among the most active players in the secondary market for FRNs and FRCDs.
While some banks are lying low, others are diversifying. LTCB is adopting a half and half strategy, says Nishida. While LTCB Asia reported an overall profit of $5.5 million for 1996 it made a $1.1 million provision for lost value in investment securities. LTCB is now looking at diversifying on the corporate side, targeting relatively high-grade corporates, but aiming for slightly higher yield through careful research. However, equity business is still limited, although it is active in Hong Kong and debt securities remains its main business.
On a wider scale, however, Nishida sees a restructuring of the players in the Asian market, with each taking advantage of their home ground. The restructuring would be a result of changes in various banks’ home territories, he adds. Japanese banks historically have a good customer base in Asia.
One bank which has already been through the painful process of merger is Bank of Tokyo-Mitsubishi. Its Hong Kong subsidiary Tokyo Mitsubishi International (HK) was formed in April last year from an amalgamation of Mitsubishi Finance and Bank of Tokyo International. Mitsubishi Finance was active in the securities business in Hong Kong, underwriting, distributing and trading, while Bank of Tokyo International was involved in loan syndication and project finance. So the merger in Asia gave the enlarged group a wide remit, says deputy managing director Shigeki Moriuchi, who took over responsibility for operations and risk management in June.
“The merger went very smoothly. There was almost no conflict and now the company is running very smoothly,” he says. Over the year a third of the 14 Japanese expats in Hong Kong have moved. The ebb and flow of staff has been mirrored in the changing face of the Asian capital markets. In the past year or so companies have been forced to reduce their funding costs.
Tokyo-Mitsubishi sales and trading senior manager Hiroshi Ishihara says the number of primary transactions has stayed roughly the same as last year but volume in the secondary market has fallen sharply, with Thailand and Korean paper being particularly hard hit. He aims to forge closer ties with its London sister company, which has around 450 staff and is putting more resources into derivatives and structured products.
“Two or three years ago we were competing with Japanese brokers, but Japanese bank securities subsidiaries policy is changing a bit. Some Japanese securities subsidiaries are changing their underwriting policy, some won’t touch low-yield paper and are looking for high yields. But BOT-M is still concentrating on the credit, with low spreads, low risk, and sometimes middle risk,” Ishihara says.
Tokyo-Mitsubishi in Hong Kong avoids equity business direct, but has a broking joint venture with Worldsec International. The Hong Kong office covers as far as India, where it is having a particular drive, although mostly in terms of syndicated loans, rather than bond issues, through its four Indian branches.
“We want to be more active in the Asian currency debt market,” says Moriuchi. The bank chased the mandate for the IFC’s first Europeso deal recently but lost it to Deutsche Morgan Grenfell. It has pursued three such Europeso deals without success.
However, despite their ambitions, Japanese banks are facing difficulties both in accessing the US and Euromarkets, and because of the lack of appetite of Japanese investors for Asian paper. Ishihara says: “In the last two or three years the balance has already shifted. Three or four years ago Japanese banks had some lending power in Asia but gradually the power of Japanese banks is getting smaller and the other banks such as the US and European investment banks are benefiting from investors in the US or Europe buying Asia paper with 10, 15 year or even century maturities. But the Japanese banks find they cannot access the US market.”
The Hong Kong dollar market is one of the few which has remained attractive. Tokyo-Mitsubishi is co-operating with its London office to exploit it, as well as distributing European products in Asia and introducing Asian products to Europe.
With the competition intensifying, diversification as well as restructuring is a recurrent theme among the bank securities arms.
IBJ is among those diversifying in products and regions. In common with the other Japanese banks, IBJ views itself as conservative. As one banker put it: “The securities arms of the Japanese banks are invisible and mainly compete among themselves.”
IBJ sees Daiwa as its main competitor, along with the US and UK investment banks. IBJ aims to differentiate itself by serving the elusive Japanese investor, albeit on a limited basis. Despite the securities houses’ and banks’ enthusiasm for Asia, it is not mirrored by Japanese investors. Both institutions and individuals remain cautious of Asian markets, with only the large life insurers making any notable inroads. But, the pie is getting bigger for Japanese securities houses. “This area needs a huge amount of money and we can bring Japanese money and technology here,” says Daiwa’s Semba.
Mutual funds could also become more prevalent, thanks to new legislation which will allow Japanese commercial banks to sell funds through branches from December 1. While Japanese investors are sticky about Asian investment, flows in the opposite direction are also fairly small, although there is some Singapore and Hong Kong money going into Tokyo real estate, which is considered by Semba to be “quite cheap” compared with Hong Kong prices. Asian money going into Japanese equities is also increasing, although Japanese weightings in global portfolios are still small, he laments.
One of the biggest problems is that by tracking the Nikkei index investors are getting a large slice of exposure to the banks, while if they selected individual stocks they would see better returns, he argues. When they are not trying to coax money out of Japan, the Hong Kong and China markets still remain the most attractive for the Japanese securities firms, with B and H shares the main draw.
Yamaichi is also putting its bets on China, forecasting GDP to grow 10% a year in the next three years. Hong Kong equities are worth sticking with, says an executive, who is seeing big orders from Japan, as well as the US and Europe, helped by the sluggish Tokyo exchange, scaring away retail interest there. There is less confidence about investing in the Japanese market but so far, the Japanese economy seems to be recovering, although he reckons it will be another couple of years before full recovery.
Asian IPOs are another area. “The only area we are concentrating on is red chips. We expect quite a large flow of business from China,” says Semba. Daiwa has offices in Shanghai and Beijing.
“Anything can happen in China, but so far it is quite good. What they wish to have is the technology for development and that area is quite difficult as Japanese corporations such as Sony and NEC don’t want to export their technology to these countries.”
But Semba sees an opening in targeting the small to medium-size Japanese family companies with technology, especially those listed on the OTC and perhaps founded on a single technology.
Daiwa is moving an M&A specialist to Hong Kong from Tokyo with that in mind, given that the firm’s Japanese venture capital arm has investments in 200 to 300 companies in Japan. Hong Kong is also still Nomura’s best Asian market, although Go expects some money to shift to Singapore and Malaysia this year.
In a bid to spread itself further, IBJ has now started to target retail investors in Singapore. In Taiwan and Korea it is focusing on high- net-worth individuals, although its main clients remain institutions.
The potential of retail investors has not escaped Nomura either. While the market remains limited, Nomura sees Japanese investors edging towards mutual funds. It also sees another niche with European institutions shifting their decision-making functions for Asian investment from London to Hong Kong. However, Hong Kong institutions are switching their European decision-making functions to London.
