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Euromoney’s 2018 interviews with chief executive Nobuyuki Hirano* and CFO Aki Tokunari shed light on an institution that is acutely aware of the problems facing Japanese banking and has a clearly articulated strategy to deal with them, both domestically and internationally.
The problem is that those domestic challenges are not getting any easier, and developing momentum at home will take years. It is no surprise that Hirano’s restructuring plan for MUFG did not opt for the classic three-year cycle commonplace in plans like these in Japan. Instead, he went for a six-year path. It is also telling that, despite the intended transformation, he does not expect either net operating profit or return on equity to improve in the next three years, even if targets are met.
The interim results reported on November 13, marking the halfway point of a fiscal year that will end on March 31, illustrate the problem.
Net operating profits dropped by 19% year on year to ¥568.1 billion ($5 billion), in large part because of a decrease in net gains on debt securities (a year earlier MUFG had booked large gains from selling Japanese government bond holdings).
However, profits attributable to the owners of the parent were up 4% year on year to ¥650.7 billion, thanks to an improvement in credit costs and an increase in profits from the bank’s stake in Morgan Stanley. In fact, the result was enough to increase the full-year target to ¥950 billion.
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Nobuyuki Hirano |
The difference between these two figures – net operating profits from the underlying business and total attributable profits including contributions from subsidiaries – tell us just how important the Morgan Stanley stake has become to MUFG. It accounted for ¥126.4 billion in the first half alone – almost twice as much as MUFG’s trust bank.
When it comes to the operating businesses, however, things are tougher. Profits shrank in the two biggest businesses, global markets and retail and commercial banking, with growth only coming from either smaller business lines (such as asset management and investor services, and to a modest extent Japanese corporate and investment banking), or from overseas, with both global commercial banking and global corporate and investment banking experiencing growth.
“Everyone is aware we face an unprecedented challenge as a society and an economy,” Hirano tells Euromoney. “What we have to do is take this vast challenge against us” – zero interest rates, an ageing population and a declining birth rate – “and turn it into new opportunities.”
A US-China trade war and growing market volatility won’t help, he says, nor will shrinking loan spreads.
The jury is still out on whether or not Hirano’s grand ambitions for transforming domestic banking can work. One aim is to put Japan’s vast unused individual savings pool to work and provide wealth management advice on it. It is a great strategy if it works, but one that requires mainly elderly people to start paying decent fees for advice for the first time in their lives.
Another objective is cost cutting, accompanied by a reskilling process that will take people away from superfluous clerical jobs and bring them some way towards digital roles. Neither will be easy.
In the meantime, however, the bank’s international expansion has gathered pace. It is a coherent, committed and practical plan. During 2018, the bank got through two of the three phases of its plan to own Indonesia’s Bank Danamon (it will probably achieve the third step in 2019, although nobody at MUFG is making any assumptions) and enjoyed the fact that it has chosen its partners wisely elsewhere in Asia. Security Bank in the Philippines and Bank of Ayudhya in Thailand are banks with a sense of momentum about them; its stake in VietinBank in Vietnam exposes it to perhaps the most attractive demographic story in Asia.
The strategy, Hirano says, is: “Identify the best medium-sized bank in each country, then leverage their strength and expertise and reputation in the marketplace, and help them to grow with our investment and expertise.”
It can take years.
Individually, these stakes are working. Hirano’s intention to get all of them to work together – and with the bank’s US holding, Union Bank – may prove tougher to realize. But even if the synergies do not come together as he hoped, these investments will all have proven to be worthwhile.
The bank continues to find new ways to grow overseas, acquiring the global asset management business of Colonial First State from the Commonwealth Bank of Australia and inking a strategic agreement with the China Investment Corporation within the space of a single week in October.
It is also trying to be bold in tech, signing a memorandum of understanding in November to use Ripple for cross-border payments to Brazil, having announced the development of its own cryptocurrency earlier in the year.
The sense when talking to people such as Hirano and Tokunari is: ‘you’re really up against it in Japanese banking, but at least you’ve got a plan’.
Hirano is such a rock star in the context of his industry that succession makes people nervous, but MUFG Bank chief executive Kanetsugu Mike* presents a strong option.
In the meantime, Hirano says he is still having fun.
* After this article was filed, MUFG confirmed that Kanetsugu Mike will become president and group CEO of MUFG from April 1. Nobuyuki Hirano will become chairman
