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Best domestic bank: Sumitomo Mitsui Financial Group
Japanese banks are facing a difficult future, being forced to choose between a domestic market that offers few obvious sources of growth and an international market that is cluttered with competition.
Sumitomo Mitsui Financial Group (SMFG) gives a good demonstration of how rapidly Japan’s banks are turning overseas. SMFG’s offshore loan book grew around 13% year on year by the time it announced its first-half profits for the six months to the end of September. The bank now has an overseas loan book worth around $227 billion, making up for lacklustre demand from its onshore clients.
But even though moving offshore has now become the obvious plan for Japanese banks, the bulk of SMFG’s business continues to be onshore. The firm generated around 68% of its profit from the domestic market in the financial year ended March 31, 2017. That comes as little surprise, but what is striking is how well SMFG has been able to navigate the market.
SMBC Nikko, the securities arm created from its acquisition of Nikko Cordial Securities in 2009, managed to increase its profits by almost 31% in the six months to September 30, 2017.
SMFG’s retail unit, which dwarfs its other divisions in gross profit terms, achieved a slight rise in first-half income despite the sharp drop in bond trading. SMFG even managed to increase its lending, despite a wider slowdown in loan demand.
The more domestic focus of its business – whatever its long-term logic – is also helping to keep its costs in check. Its general and administrative expenses, a gauge of non-revenue generating operating costs, rose only 1% compared with the first half of the previous financial year. By contrast, MUFG saw its G&A expenses rise 5%, while those at Mizuho rose 3.5%.
SMFG also impressed Asiamoney in not relying too much on the sale of stock to boost profits. By selling some of its domestic equity portfolio in the first half, Mizuho generated a net gain of ¥115 billion ($1 billion), around 25% of pretax profits. SMFG also pulled in a large chunk from the sale of securities, nabbing ¥52 billion, but this only represented 8% of its overall profits, according to Moody’s.
This leaves SMFG with an obvious way to boost profits in the long term, provided equity prices hold up. It also gives a clear demonstration that SMFG’s management, led by chief executive and president Takeshi Kunibe, wants operating performance, not trading gains, to drive profits.
Best corporate and investment bank: MUFG
Mitsubishi UFJ Financial Group (MUFG) has been far and away the most aggressive of Japan’s megabanks when it comes to expanding overseas.
The bank has tripled its overseas loan book in the last decade, now employs around 40% of its staff outside of Japan, and holds stakes in a variety of Asian banks, including Thailand’s Bank of Ayudhya and Vietnam’s Vietinbank.
A lot of MUFG’s success can be attributed to the determined leadership and international focus of long-serving chief executive Nobuyuki Hirano, a banker held in high esteem by his peers around the world.
The tie-up has ensured that MUFG’s team has had a presence on some blockbuster deals this year, including a ¥348.5 billion ($3.2 billion) equity sale from Renesas Electronics and a ¥170 billion global yen deal for Wal-Mart. The firm also played a big role on the Tokyo Metropolitan Government’s inaugural green bond, helping develop a market that offers plenty of promise in the years to come.
In early November, there were news reports that MUFG was planning to take a 40% stake in Bank Danamon, an Indonesian lender. MUFG denied the reports when asked by Asiamoney, adding that the news was not based on any official announcement. Time will tell whether or not a deal emerges, but the move appears to fit with MUFG’s modus operandi: making bold investments in overseas markets as it continues to push for new sources of revenues.
That approach has served MUFG well. But its willingness to partner with foreign institutions has given it much more than simply an offshore presence. It has also given MUFG the firepower across different asset classes to be rightly considered Asiamoney’s best corporate and investment bank in Japan.
Best bank for SMEs: Resona Bank
Japan is a country where small and medium-sized enterprises (SMEs) can too often be overlooked. The gargantuan balance sheets of the country’s three biggest banks, which hold more than $6 trillion of assets between them, ensure only the biggest corporate clients can make a dent on revenues.
The tepid growth of the Japanese economy has ensured that any talk of growing the client base tends to focus on opportunities overseas.
It is a shame that few banks have made SMEs a core part of their business. Resona Bank is a notable exception.
The bank, formed through the merger of Daiwa Bank, Kinki Osaka Bank and Nara Bank in 2001, unveiled a three-year plan in its latest annual report that pinpointed serving SMEs as a core part of its growth strategy.
It lent ¥9.9 trillion ($87 billion) to SMEs in the financial year ending March 31, 2017. By 2020, it wants to increase that to ¥11 trillion, a roughly 10% increase.
It has also announced a plan to increase the time it spends talking to its clients by 50%, as well as rolling out digital solutions – including some automation of sales – that will make it easier for the bank to service a broad network.
Resona has around 400,000 corporate customers, according to its annual report, but only around 20% of those have taken out loans. Resona thinks it can increase that number a lot.
It is also making plans for the next generation of SME business owners. The age of current SME business heads has given the bank an opportunity. It thinks its succession planning-related income from these clients will grow to ¥14 billion over the next three years, from ¥10 billion in March.
It remains to be seen if Resona will be able to achieve a series of growth targets that, in the context of Japan’s tepid economy, look particularly ambitious. But by aligning its fate so closely with SMEs, the bank will make the most of a sector that does not always get the attention it deserves. It may just help create the next corporate giant along the way.
Best bank for CSR: Sumitomo Mitsui Financial Group
Corporate social responsibility still does not appear to be a big priority for Japanese financial institutions. On a recent trip to Japan, Asiamoney was struck by how many bankers shrugged when asked how much their institution was doing to promote CSR, or about the related priorities of environmental, social and governance (ESG) issues.
But Sumitomo Mitsui Financial Group has made CSR a priority over the last few years. The bank has set up a group CSR department with its corporate planning division, as well as putting together a CSR committee that it says meets periodically. Perhaps more importantly, it has actually given some clarity to those wondering quite just what CSR means – or should mean – for banks.
SMFG has split its CSR strategy into three areas: a push to help the environment; an attempt to support the next generation in Japan and elsewhere; and a commitment to helping build a sense of community, which includes helping non-profits fund social inclusion and supporting reconstruction in areas damaged by natural disasters.
The nature of banks means the most obvious success stories have come on the environmental side. The rise of green financing has given banks an opportunity to show off their ESG credentials at the same time as generating fee revenue, and SMFG has jumped at the chance.
Sumitomo Mitsui Banking Corp became the first Japanese bank to sell a dollar green bond, issuing a $500 million deal in October 2015. It returned to the offshore market this year, raising €500 million at holding company level. These deals have helped grow a market that is going to be crucial for ensuring capital markets can help, rather than hinder, environmental efforts in the years to come.
SMFG’s debt team has also helped a plethora of other Japanese investors tap the green bond investment. Perhaps the most prominent deal was a domestic green bond offering from the Tokyo Metropolitan Government in October, the first time a Japanese local government had tapped the market.
The ¥10 billion ($88 million) deal was split between five- and 30-year tranches, and was partly designed to help fund the development of Tokyo as a smart energy city. SMBC Nikko and Mitsubishi UFJ Morgan Stanley took the lead on the short-dated tranche, with the SMFG subsidiary underwriting ¥3 billion, according to Dealogic.
It is deals like Tokyo’s that will grab the headlines, and SMFG deserves a lot of respect for its role as an underwriter. But by making an internal commitment to CSR at the same time, the bank has shown that responsibility means more to it than just a sales pitch.
Best international bank: Morgan Stanley
Morgan Stanley has an enviable position in Japan, being the only international bank to have a joint venture with a large local player.
In fact, Morgan Stanley and Mitsubishi UFJ have two: one largely led by the US bank, the other run by MUFG. That may have appeared confusing when it was first unveiled more than six years ago, but the structure – designed in large part to placate local regulators – has proved an unqualified success.
The two joint ventures have snagged key roles on some of the most prominent deals in the country over the last 12 months. This includes Renesas Electronics’ ¥348.5 billion ($3.2 billion) follow-on offering, Softbank’s $4.5 billion offshore hybrid capital issue and Sekisui House’s ¥120 billion domestic hybrid.
The bank has also worked on landmark M&A deals in and out of Japan over the last year, one area where few of its rivals are in a position to compete.
The biggest is also one of the most recent: Morgan Stanley is advising Bain Capital and SK Hynix on their $17.9 billion acquisition of Toshiba Memory, a deal announced in late September. It has also been on plenty of other deals.
The bank was the sole financial adviser to Endurance Specialty, a Bermudan insurer that was bought by Japanese insurance company Sompo for $6.3 billion in March 2017. It was also the sole adviser to KKR when the private equity firm, undoubtedly a discerning client, bought auto supplier Calsonic Kansei for around $4.5 billion in May.
Morgan Stanley’s tie-up with Mitsubishi UFJ has been a remarkable success story, particularly against the backdrop of Japan’s otherwise rather staid banking system, where meaningful tie-ups are rare and a small handful of large firms are consistently vying for the biggest deals.
Morgan Stanley’s president and chief executive in Japan, Jonathan Kindred, deserves a lot of credit for making sure that what could have been a clash of cultures works rather well.
Morgan Stanley’s rivals have done some impressive work in Japan, particularly in the country’s debt capital markets. But by expanding its client reach with the joint venture, and bringing its M&A and ECM skills to bear in a market that offers large, but irregular opportunities in both, the US bank has an indisputable claim to be the top foreign bank in the country.
Best private bank: Mitsubishi UFJ Morgan Stanley PB Securities
When Asiamoney asked one bank executive to name the best private bank in Japan, his response was telling: there is only one. In truth, some of the world’s biggest private banks offer services to Japanese clients. But Mitsubishi UFJ Morgan Stanley PB Securities, led by Satoru Adachi, stands out from the crowd.
The bank has made the most of the successful tie-up between Morgan Stanley and Mitsubishi UFJ, but private banking was not immediately part of the deal when the two banks agreed to form a joint venture in 2009. The merger between the two private banks was announced in late 2013, a year after MUFG bought out the wealth management arm of Bank of America Merrill Lynch in Japan.
By combining its own firepower with that of two of the best-respected US banks, Mitsubishi UFJ dominates private banking in Japan.
A quick look at Euromoney’s private banking survey in February shows its lofty position. The firm was unsurprisingly voted best private bank in the country. But it was also voted the best for every wealth bracket, from super-affluent clients to high net-worth and ultra-high net-worth clients.
This is not to say it has faced an easy environment. The Bank of Japan’s aggressive approach to monetary easing has made volatility a distant memory in the fixed income markets, hurting the potential for trading revenues.
Even worse is that low rates have not led to a boom in borrowing appetite.
But Mitsubishi UFJ Morgan Stanley PB Securities has proved able to navigate these problems. The firm pulled in revenues of ¥19.9 billion ($175 million) between April and September 2017, an increase of 30% over the same period in 2016.
Its half-year profits shot up too, from ¥2.7 billion to ¥4.56 billion.
The tie-up between Mitsubishi UFJ and Morgan Stanley may get most attention for the deals the two firms are able to put together for their clients, whether acquisitions offshore or capital market issues, but the partnership has proved to be much more than a deal factory. The success of the private bank proves just that.
Best digital bank: Mizuho
Japan has been slow to embrace financial technology. While services like Alipay and Paytm have spread throughout Asia, Japan remains a largely cash-based society. Some of the country’s biggest banks are making efforts to change that.
MUFG has certainly attempted to push the country in the right direction, preparing the launch of MUFG Coin, the latest Bitcoin imitator in a global financial landscape now blotted with obscure cryptocurrencies. But Mizuho’s own efforts, with the impending launch of J-Coin, appear better placed to get widespread use.
For one thing, Mizuho has convinced a consortium of banks and financial institutions to come along for the ride. Japan Post Bank is the biggest name, but a plethora of regional banks are also expected to participate. Between them, these banks will create a yen-pegged digital currency that consumers can spend with their smartphones.
This is far from the only impressive move Mizuho has made in the digital world. The company teamed up with Japanese tech conglomerate Softbank in late 2016 to launch J-Score, a lending company that relies on an artificial intelligence programme to make its decisions.
Mizuho has also created a subsidiary that will encourage the development of new fintech companies. Incubation PT, launched in July 2015, was renamed the Digital Innovation Department earlier this year. Mizuho marked the change by appointing a chief digital innovation officer, Daisuke Yamada.
These are only the latest steps for a bank that has been making strides into digital over the last few years. Mizuho created apps for wearable devices and made efforts to incorporate blockchain in its verification process for international bank transfers.
The push towards technological solutions could soon make a big difference to its cost structure, too: the company is planning a big reduction of its workforce by relying more on automation, according to local press reports.