Revenge of the zombie bank 1.0 – Bank of Tokyo-Mitsubishi UFJ
The infamous term zombie bank, coined in 1987 by Ed Kane, a professor of finance at Boston College in Massachusetts, has almost been exclusively associated with the Japanese banking sector of the 1990s. That's all about to change.
Nowadays, it is Europe’s banking sector that has drifted into the shadow of its definition, where, to use Kane’s own dark turn of phrase from 2009, an institution “would be put to its grave by its creditors if it weren’t for the black magic of government credit support guarantees and loans”. Indeed, it is widely believed if it were not for the ECB’s LTRO initiatives, many of Europe’s banks would be insolvent.
The tables of global finance are turning and, after a lengthy period of stagnation, Japan’s leading banks have emerged from their zombie stupor and out of that gloomy shadow. They have become viable counterparties in the financial markets, which presents them with an opportunity to expand and grow the business they do outside Japan. That’s no more so than in foreign exchange.
Akira Hoshino, Bank of Tokyo-Mitsubishi UFJ’s (BTMU) global head of FX trading, tells EuromoneyFXNews the bank is now much more focused on expanding beyond its traditional client base of Japanese corporates, driven by a more active extension of its balance sheet outside Japan, across Asia, the Americas and even Europe.
This month it said 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%.
“We are very 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, when EuromoneyFXNews meets him on one of his recent visits to London.
What all this has culminated in is that non-Japanese corporates are now 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 zombie companies.”
The bank now operates off solid foundations. BTMU has steadily increased its tier 1 capital ratios from 7.76% in 2009 to 13.04% 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+ rating. It also means it has less need to reduce risk-weighted assets, and join the slippery slope of deleveraging.
The results of this year’s Euromoney survey will provide an important gauge as to whether its underlying strength and renewed global ambitions have started to translate into market share. In the meantime, BTMU still needs to strike the balance between expansion and solidifying its home-market position.
Keeping a close eye on the home front
Since 2007, it has seen the erosion of market share from foreign banks, such as Barclays Capital and Citi in particular.
|“Investment in our e-trading platform is
a core area in which a lot of our energies
and resources are being placed.”
In 2007, it commanded more than half of the market, but by 2011 that had dwindled to 14%, according to Euromoney market data – although the doubling in the vote in that time provides a dilutive effect – and BTMU adds that some of its foreign rivals have been more aggressive in securing votes from those clients. Nonetheless, 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 that erosion. However, it continues to dominate its two-biggest local rivals, Mizuho Financial and Sumitomo Mitsui.
He also adds that corporate volumes have also been boosted by a shot in the arm from increased M&A activity as a result of the strength of the yen, which began last year at 82 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 shows overseas direct investment (ODI) 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.
BTMU will hope it can boost its corporate market share this year, in what has been a flat year in other client sectors, and were the highlights of its improving market positioning in recent times. Last year, it jumped from 26th to 14th in the real-money global rankings, but Hoshino says volumes have remained relatively flat during the past 12 months.
Mr and Mrs Watanabe
BTMU has also faced stiff competition in the retail sector, which forms a larger part of the Japanese currency market – about 30% – than it does in other geographic regions. The Japanese megabanks have generally lagged in their investment in technology and trading solutions, while the entry of more agile retail aggregators, has seen their historical hegemony eroded, says Javier Paz, senior consultant at Aite Group and who has written several papers on the Japanese retail FX market.
“The rising dominance of retail aggregators in the margin-trading space is one of the biggest structural changes in the Japanese FX market, and one of the biggest challenges we face is to regain a presence in this market,” says Hoshino. “The only way the banks can respond to this is to invest and build better infrastructure, superior pricing, technology and execution.”
However, aside from costly investments in technology, their balance sheets might be the most effective way for banks such as BTMU to regain retail market share through timely acquisitions of distressed competitors, says Paz.
A group of about 20 firms has now come to dominate the retail FX space, but tougher legislation on leverage limits during the past 18 months has left some of those smaller firms more vulnerable.
The leverage restrictions have reduced volumes thus putting pressure on some of the smaller firms that relied on very high leverage, and therefore making them potential targets for preying banks looking to acquire margin-trading accounts, says Paz.
Can BTMU be a global player?
It has always been a widely-held view that Japanese banks have never quite had the appetite to be truly global players, whether that was FX, or any investment banking business. Nomura has in recent years attempted to debunk this trend. They were often seen as too Japan-centric and too detached from their overseas operations to be effective.
Hoshino admits this has been a weakness in FX, a situation he himself can attest to, having been head of proprietary trading in London between 2007 and 2009, as well as having numerous stints in there in the preceding 17-years. It’s something he's trying to improve and that forms an important part of his strategy. He has put in place initiatives to enhance regular communication between trading hubs, with each operation in FX reporting directly to him in Tokyo.
However, Hoshino is fully cognisant that BTMU’s ambition will be nipped in the bud if the bank doesn’t produce a viable electronic trading platform. (See EuromoneyFXNews' buyside e-trading survey results for the growth in single dealer platforms).
“Investment in our e-trading platform is a core area in which a lot of our energies and resources are being placed,” says Hoshino.
Development on ‘BTMU FX’ began from scratch in 2010, and was released to in Asia in October, and though it is becoming more and more difficult to differentiate e-platforms these days from the more established rivals, it has introduced elements of Japanese hospitality to it, a spokesman says. A co-location service will be released in the near future to enhance speed.
While BTMU has operated eFX in Japanese retail space since the 1990s, Hoshino explains that part of the reason behind the sluggish roll-out of the e-trading platform is down to the fact that Japanese corporates – still the majority of its customer base – have typically preferred to do most of their FX business by voice trading.
And that is the balance BTMU must strike, between remaining consistent and loyal to its home market while using its position of strength to muster a greater share of a global market that is hooked on the speed and efficiency of the electronic FX superhighway. The question now is, can it see it through?