An elderly, shrinking population with plenty of savings and a steadfast unwillingness to spend them. Negative interest rates and 10-year government bonds that yield exactly nothing. Companies that do not need to borrow and have to be coaxed to spend on anything that might require billable advice. Welcome to banking in Japan.
Japan’s big three banks have been wrestling with these worsening problems for a decade, each of them coming up with strategies, plans and visions to make lemonade from the lemons that surround them domestically. Their decisions resonate globally: Japan is still the world’s third largest economy, and is home to four of the world’s top 20 banks by assets (the big three plus Japan Post Bank).
But the one that bears closest scrutiny is MUFG, the Mitsubishi UFJ Financial Group. It is the biggest – total assets of ¥299.1 trillion ($2.65 trillion) at the end of June, ranking top five worldwide – and it is also the one with the clearest strategy about what to do both inside and beyond Japan. Through long-standing US investments and partnerships and more recent southeast Asian acquisitions, it is the Japanese bank most embedded in the fabric of global banking, with all the benefits and challenges that entails.
|Nobuyuki Hirano, MUFG|
More than any other financial institution in Japan, MUFG is identified with one person: Nobuyuki Hirano, president and group chief executive of MUFG and chairman of MUFG Bank.
Born in Gifu in 1951, his history in the institution dates back to joining the Otemachi, Tokyo, branch of Mitsubishi Bank in April 1974, a month after graduating from Kyoto University’s faculty of law.
Globally, he is the most recognized Japanese banker, more so even than Haruhiko Kuroda at the Bank of Japan or Takehiko Nakao at the Asian Development Bank. Articulate and absolutely fluent in English, with firm views on everything from Japanese fiscal policy to US brokerage, his time on the Morgan Stanley board has brought his clear thinking and sense of strategy to a global audience.
So how is he going to fix Japanese banking?
“Everyone is aware we face an unprecedented challenge as a society and an economy,” Hirano tells Euromoney in the bank’s head office in Marunouchi. “The banking industry is probably one of the industries which was hit hardest by those structural changes.”
Low to negative interest rates make it hard to earn easy money, and the ageing population and declining birth rate make it tough to talk about the potential for growth.
“What we have to do is take this vast change against us and turn it into new opportunities,” he says.
That is easier said than done, but the clearest example of what he means can be found in wealth management.
A conversation about wealth management in Japan is very different to anywhere else in Asia. In Singapore and Hong Kong, wealth managers are chasing new, emerging wealth – the rising middle class, entrepreneurs going up in the world. In Japan the opportunity mainly involves much older people, often retirees, those who have already long since gathered their money.
“Our advantage in Japan is the accumulation of wealth,” says Hirano. The recovery and development of the Japanese economy after the Second World War created a large amount of financial assets alongside advanced industry and well-educated human resources. These people accrued a lot of money; it’s just that nobody is doing anything interesting with it.
“We have $16 trillion equivalent in household financial wealth in this country, the second largest in the world,” he says. “But it’s left untouched. More than 50% of those financial assets are kept in the bank account earning almost zero interest.”
Clearly, that asset base presents a huge opportunity, for MUFG in particular: it has 34 million retail clients and ¥70 trillion in retail deposits in the domestic market. Imagine putting that to more productive work.
“Why not take that advantage? That’s the starting point, for me,” says Hirano.
As I always tell people: each institution should insist on its core competencies rather than being a global player- Nobuyuki Hirano, MUFG
The money sitting in deposits helps nobody; the asset owners are not getting any return on their money and the banks cannot make a net interest margin in this environment. What banks like MUFG want is for these customers to move towards wealth management, but for that to happen, wealth management itself has to change.
“In the past our wealth management model – if we had a wealth management model, that’s a question – was to sell mutual trusts and gain the sales commission, that’s about it,” Hirano says. “We did not pay in-depth attention or provide in-depth analysis to our retail or wealthy clients about the design of their life or life-stage planning.”
He presents changing this attitude not just as a fillip for banking but also of broader consequence for society.
“Japanese individuals have to help themselves,” he says. “Both household individuals and business leaders. They have a deep anxiety about the future, so they do not consume, they do not invest and that drags down the potential of the Japanese economy for growth.”
The problem is that this is not an easy constituency to get to change their ways.
“Many of the people banks are targeting in their wealth management plans are in their 70s,” says one banker in Tokyo. “And they have spent their lives paying no fees for things. They believe that the advice is free.
“Expecting them to suddenly change to pay 2%, particularly when there are assets in Japan yielding nothing, is not easy.”
Analysts also have questions about whether or not this can work.
“I still do not have a clear view on the future of wealth management in Japan,” says Rie Nishihara, analyst at JPMorgan. “In past decades many western financial institutions came to Japan for private banking – and they withdrew,” she says, citing HSBC and Citi.
“I really question whether wealth management here can grow like it has in European or US countries or even in Asia.”
Katsunori Tanaka, analyst at Goldman Sachs, thinks it is the right area to focus on domestically – albeit among a fairly limited field of options.
“Generally speaking, there is no growth area in Japanese financial services, but the biggest opportunity in Japan is wealth management,” he says. “Japan has had no wealth management industry in the past. The market environment is tough, but there is a need for it in an ageing society.”
MUFG’s effort will be crucial, and Hirano thinks that this is a good moment to attempt to get it right. In addition to all those retail clients (of whom 1.2 million are targeted for wealth management), there are also 1.3 million corporate clients – MUFG is targeting 50,000 of them for wealth management services too. That is because the corporate owners are exactly the people to whom wealth management services should be sold, and they happen to be in a period of generational transition.
“Corporate owners are the growing core of wealthy individual clients for us,” Hirano says. “In the past, they were land owners or farmers, because they owned a lot of land to be developed as housing, but now there are increasing numbers of corporate owners who are reaching the stage where generational transition or succession takes place. And succession gives us a huge opportunity.”
Succession gives something to sell to, and to achieve this the group has tried to get its three distinct channels – bank, trust company and securities company – to work together on a single platform.
It is not automatic that just because these people need advice they will be willing to pay for it. But it is enough to give Hirano some optimism.
“The current stage of the Japanese economy is, in general, viewed as very dark and hopeless. But it’s not necessarily the case,” he says.
Like many banks around the world, MUFG is counting on digitization to do a lot of the hard work. It has some strikingly ambitious targets. The bank has said it expects digitization to boost profits by ¥200 billion over the next seven years, two thirds of it by streamlining business processes as part of an attempt to automate 30% of operations in its core banking unit by 2024.
Everyone says this sort of thing, and MUFG’s investor relations presentations look as impressive as anyone else’s, filled with AI, digitized mortgage products, streamlined approvals and digital accelerators. But there are distinctive issues around MUFG’s plans.
One relates to Japanese society itself. At one stage, Hirano was talking about reducing the headcount in clerical jobs by 11,000 – the number he uses now is 9,500 – but Japan is simply not a place where one can make large numbers of people redundant. Many join banks in Japan with expectations of a job for life.
Hirano believes he can achieve what he wants without redundancies through a combination of natural attrition and retraining. It seems a highly ambitious and rather idealistic plan. Is it realistic?
“I am quite optimistic about that,” he says. “We are not trying to ask the people who are on the counters serving the clients to become investment bankers overnight. But we can use digitization to generate more productive and creative work, which employees can enjoy.
“We talk a lot about customer experience, but I also believe employee experience is important. These people will become creative, imaginative, enjoy their life.”
One thing I want to say to MUFG is: ‘Speed up’- Katsunori Tanaka, Goldman Sachs
There is that idealism again, and it is commonplace for Hirano to view banking strategy through the prism of a changing Japanese society, and his responsibility within it.
“From the social viewpoint, with the declining population, [it is important to] allocate resources in the most productive manner, to the real needs or the areas of the highest potential growth,” he says. “So the bank can also contribute to that reallocation of human resources within the whole of society.
“The reallocation of those human resources within Japanese society will greatly contribute to the solution of the declining population.”
Hirano believes natural attrition will bring down headcount by 6,000 by 2024, leaving 3,500 as the net to be retrained. Does this mean no new hiring out of the universities? For years MUFG has taken thousands of the finest minds in Japan from higher education.
“Well, of course we will continue to hire a certain meaningful level, which can accommodate our in-house needs to develop new business.”
Is Hirano trying to have his cake and eat it here? Time will tell.
Beyond the usual tech-equals-cost-efficiencies plans, MUFG has done some interesting and distinctive things. One was the launch of its own digital currency, MUFG Coin, for which the bank is trying to develop practical public uses. Then in May this year came the launch of a new blockchain-powered payment platform alongside Akamai Technologies, the Japan-based cloud delivery group.
In the blockchain world this is a potentially big step, as it is capable of processing more than one million transactions per second at latencies of less than two seconds per transaction – addressing the key drawback of blockchain technologies to date, namely their slow speed.
Tanaka at Goldman is chiefly interested in MUFG’s tech initiatives as a matter of improving the bottom line.
“The fintech area is just cost-cutting,” he says. “It is not new. They can cut costs, but I do not have any idea how it would increase their top line.”
The most distinctive part of MUFG’s plan for growth is its attitude to international expansion.
MUFG is not the only Japanese bank to have sought to expand internationally. SMBC has had a presence in London for exactly a century this year, Europe since the 1960s and the Middle East since the 1970s, and operates in 15 Asian countries. It bought RBS Aviation Capital from Royal Bank of Scotland in 2012 and has a stake in Bank of East Asia; it also retains a shareholding in Barclays although the two institutions ended a six-year alliance in 2017.
Mizuho is represented worldwide, bought Banco WestLB do Brasil in 2012, and has built up funds for global fintech acquisitions. And in investment banking, Nomura is a global business still trying to get the businesses it acquired from Lehman Brothers a decade ago to deliver.
But MUFG is the standout for the scope of its international engagement. When Hirano became president of the bank in April 2012 (he would add the group chief executive role a year later and chairman in 2016), he envisaged a pan-Pacific banking platform. By then the bank already owned Union Bank of California, where its involvement dated back to the establishment of Bank of Tokyo California in 1953, and which, as Union Bank, became fully owned by MUFG in 2008. And it had its stake in Morgan Stanley, whose consolidation Hirano had been intimately involved with.
“At the end of the day, the banking business is a mirror of the real economy,” he says. “We need to focus on the growth area. And I was aware that no matter how our government or central bank tried, the Japanese growth rate would not dramatically improve.”
Hirano has been a vocal opponent of the central bank’s negative interest rate strategy and its belief that this strategy cannot be eased until 2% inflation is achieved; he believes the policy is dampening Japan’s outlook unnecessarily.
Equally, however, he was aware that scattershot expansion rarely ends well.
“What I experienced during the course of the great financial crisis in 2008 was that those financial institutions who’d lost the focus of their business failed,” he says. “Too much diversification, too much globalization doesn’t help.” And he could see that Japan, while lacking growth, was nevertheless the source of steady, solid revenue, “which will keep our safety and soundness in essence.”
He chose Asean from the beginning, citing the wide presence Japanese industry had in those markets already – the automotive sector’s presence in Thailand being an example. “That already gave us a very solid footprint down there.”
Through Bank of Tokyo the bank had a long history of serving Japanese clients in those markets and was already embedded in their supply chain. Plus, although he does not mention this, expanding into China in any big way is politically problematic for Japanese banks.
The four Asean countries with the greatest potential GDP growth, he concluded, were Indonesia, Thailand, Vietnam and the Philippines. In subsequent years, the bank has taken big stakes in local banks in all four (plus Malaysia’s CIMB, which it subsequently sold out of, probably out of necessity so it could acquire in Indonesia, since CIMB itself owns a bank there, CIMB Niaga).
Today, MUFG holds 77% of Thailand’s Bank of Ayudhya, 20% of VietinBank in Vietnam and 20% of Security Bank in the Philippines. Most recently it has pushed its stake in Bank Danamon in Indonesia to 40%, having increased its stake from 19.9% in July, with the hope of reaching 73.8% when regulatory approval is given.
It has done all of this in a distinctive fashion: take a stake, ideally with a path to majority ownership, in an established bank in each country, but not the leader, usually a second-tier player with potential. Then send clients and capital their way, but otherwise leave them to it.
“We had two options,” Hirano says. “One was to use our own brand, as peers like HSBC or Citi or Standard Chartered have done. They usually build their franchises on their own.
“What I chose was totally different. One, 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.”
Finding the right partner, he says, takes time.
“Sometimes it takes five or six years to get the alliance agreement executed” from the original process of screening and identifying banks, he says.
The idea is that banks are given the space to do what they are good at.
“We appreciate the culture and traditions and values of each partner bank,” he says.
But also they benefit from plugging their clients into MUFG’s global platform. He recalls a time when a client of Bank of Ayudhya in Thailand wanted to buy a department store in Milan; MUFG brought in Morgan Stanley to provide the advisory services and MUFG did the funding.
In Thailand in particular this seems to have worked well. Thailand has had an apparently impenetrable big four in its banking system for many years, so it was telling that Ayudhya was named as a fifth domestic systemically important bank by the Bank of Thailand in September.
Is the Asia franchise-building finished now? The priority at the moment is to make the final stage of the complex Danamon acquisition. That would be a symbolic as much as a commercial victory.
“Historically, many players would have liked a majority stake in a bank in Indonesia but have not succeeded,” says Goldman’s Tanaka. “It looks like MUFG has built a very good relationship with the local regulator and succeeded. That is a point of differentiation.”
But, once Danamon is done, “we would like to focus on those countries and four banks, to really materialize what we wanted to achieve with them,” says Hirano.
They have said they aim to become a global bank from Japan. Thinking about Japan’s structural economic situation and declining population, I think it is the right strategy- Rie Nishihara, JPMorgan
HThe various banks, including Union, meet frequently; a week before our interview in August they had held a digital conference, and “had a quite intensive and heated discussion how each financial institution is now trying to achieve the digital transformation of their business model,” Hirano says.
He – like his CFO, Muneaki (Aki) Tokunari – is keen to present the disparate banks as a single platform gaining benefits from one another.
Union, incidentally, has proven crucial for another reason: US dollar deposits and access to US funding.
“To have a sticky and stable deposit base in the US is meaningful for MUFG,” says Nishihara at JPMorgan.
Banks in Japan note the velocity of Hirano’s Asia strategy compared with its peers.
“Other Japanese banks have dipped their toes in the water in Asia but never gone in as heavily as MUFG,” says one competitor.
Analysts are generally on side with this.
“In their earnings outlook, in three years 50% of earnings growth will come from their global commercial banking group,” says Nishihara. “They have said they aim to become a global bank from Japan. Thinking about Japan’s structural economic situation and declining population, I think it is the right strategy.”
Is it important that Japan has a champion in global banking?
“Well, I don’t think we are a champion,” says Hirano. “As I always tell people: each institution should insist on its core competencies rather than being a global player. What is your strength? Decide what you are good at, how you best serve clients and then set up the strategy and business model.
“What we would like to be is the world’s most trusted financial group. That’s our vision.”
There are other plans and objectives to Hirano’s turnaround: 11, to be precise, or 10 with digitalization running across all of them. They range from revolutionizing distribution channels to realigning the relationship between relationship managers and product offices; exploiting the real estate value chain to becoming a globally recognized asset manager; integrating the service of institutional investors more effectively to recycling loan assets with a greater emphasis on growth.
|Katsunori Tanaka, |
Nishihara thinks priorities should be: “To make the best of their deposit base”, as well as enhancing their brokerage business. Tanaka agrees that retail brokerage has been a weak spot at the bank, but says the corporate relationships have been strong enough to expand into investment banking through the Morgan Stanley network.
It should be said that for all of Hirano’s transformation objectives, the target does not involve improving either net operating profit or return on equity for the next three years. Is this running to stand still or simply realism that a full turnaround cannot be achieved quickly?
The analysts would like things to be swifter.
“One thing I want to say to MUFG is: ‘Speed up’,” says Tanaka. “I completely agree with the strategy. It is 100% right. But they can speed up, especially the cost-cutting efforts.”
Hirano wants to be realistic. “It will take time,” he says, noting that this plan runs not through a classic three-year cycle common in Japanese banking, but through two of them, six years.
“That’s an unprecedented span of time,” he says. “In the past, Japanese banks always took three years for their medium-term plans, but we took six because it takes longer, much longer. Because it changes our business model, it changes our operating platform, it changes human resources.
“So it’s a huge undertaking, but that’s fun, isn’t it?”
Does he still thinks it is fun after 44 years?
“I feel really lucky I’m here,” he says. “Of course, every day I have to think intensively about what we should do, but at the same time this [transformative moment in banking] could happen once in decades. It could be once in a hundred years, as it is for the automotive industry.
MUFG struggles to contemplate life after Hirano-san
Hirano still thinks his job is fun. That is probably a relief for those who worry about who will succeed the president, group chief executive and chairman of MUFG.
“The problem is the question of who comes after Hirano-san,” says one banker. “He is so big a figurehead. You meet him and he presents an attitude of being absolutely in control – an attitude that some could see as arrogance. But he is so instrumental to the whole bank that he will be extremely difficult to replace. People worry about it.”
“If there is a weak point at MUFG, it is succession planning,” says another banker. “Hirano has the global network and is the smartest person at MUFG. Usually the smartest guy is not the chief executive.”
Succession planning was interrupted by the departure of the then-president of Bank of Tokyo-Mitsubishi UFJ (BTMU), Takashi Oyamada, last year, apparently through illness. Oyamada had been in the role a little over a year, had just become chairman of the Japanese Bankers Association and had been seen as a likely successor to Hirano.
Oyamada was replaced by his deputy president, Kanetsugu Mike, who is in turn now seen as the most likely long-term successor. The bank is the core unit of MUFG and always the most likely place from which a group leader will spring.
When the time comes, the market is quite happy with the idea – although Mike, aged 61, is only five years younger than Hirano, so it is not a foregone conclusion Hirano will leave before him.
Mike is of an international mindset himself, having studied at Wharton and worked in New York running MUFG’s international operations. At BTMU he has prioritized efforts to improve productivity and has bemoaned the culture of endless meetings in Japan. His nickname, Sugu, means “right away”.
That combination of domestic and international experience is what has differentiated Hirano.
“He has a clear view both of the domestic business environment and the global financial system,” says JPMorgan analyst Rie Nishihara. “As a Morgan Stanley board member, he understands corporate governance and business strategy. With MUFG’s expectations for global commercial banking contributing more than half of future growth, it is really important to be able to deal with the partner banks.”
Then again, Hirano is not talking about retirement and says it is a matter for the board. Some think he might hang in there indefinitely.
“Maybe he’s going to be like [Malaysian president Mohamad] Mahathir,” says one Tokyo banker, “and carry on until he’s 93.”