October 25, 2012 7:24 pm
Japanese banks: Back in the saddle
©Bloomberg
On the road again: a cyclist passes bank signs in Tokyo. Japan’s lenders are fleeing a weak domestic economy to pursue overseas loans
After decades of looking with envy towards Japan’s bullet train, the legendary shinkansen, Britain’s beleaguered commuters can now hope that something of its metronomic punctuality may be heading to the UK.
Hitachi, a company that has helped build bullet trains for 40 years, is leading the Agility Trains consortium that won a bid in July to modernise the UK’s intercity network. Crucially, the financing is as Japanese as the technology. Agility’s £2.2bn loan required for upfront investments came from a consortium of nine banks. Six were Japanese.
That funding from Tokyo is part of a conspicuous trend of Japanese lenders coming out from their internal exile and returning to the offensive across the world, taking advantage of the weakness of US and European rivals constrained by the financial crisis and tightening regulation.
Few corners of the world seem untouched by the Japanese banks, which are also being pushed to expand by a stagnant domestic economy where demand for loans is weak. Bank of Tokyo Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation are participating as underwriters in a $1.5bn trade finance facility for the Ghana Cocoa Board this autumn. SMBC has also been chosen as sole financial adviser to the Saudi Arabian government in its privatisation of Medina Airport.
Such deals represent a stark psychological shift for Japanese lenders who beat a rapid retreat back to their home market during Japan’s financial crisis of the 1990s, when a sharp fall in asset prices saddled banks with bad loans. Japan’s three largest banking groups – Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho – are all now muscling in on major lending deals, from long-term infrastructure projects in remote parts of the world to large syndicated loans in developed economies.
In the past two years, Mizuho’s overseas loan balance has increased 52 per cent to $127.8bn while SMFG’s has increased 42 per cent to $128bn. MUFG’s overseas loan balance has risen nearly 20 per cent from Y16.7tn at the end of March 2010 to Y19.9tn at the end of March 2012.
“This is a great time to strengthen our relationship with overseas customers because the financial crisis has reduced the number of banks they can do business with,” says Nobuhide Hayashi, head of international banking at Mizuho.
Another head of international business at one of the so-called “three mega-banks” says he is also struck by the range of clients looking for overseas financial services from Japan. “We are being approached even by middle-sized enterprises and we have been able to act as lead arranger of syndicated loans, so we are very happy,” he says.
Still, Japan’s financiers are wary of hubris as they have embarked on ill-fated forays abroad before. In 1990, there were about 100 offices of Japanese banks in New York alone but Japan’s financial crisis forced many of these adventurers to pull back.
Despite this, they concede there are definite dangers in going abroad again. There are particular concerns about their lack of foreign executives and the difficulty in attracting international deposits, which poses implications for dollar funding. Japan’s biggest banks also already seem to have entered a gruelling price war on their return to the international market, even undercutting each other with cheap loans.
Yet Japan’s banks in many ways appear robust, having avoided much of the investment in tarnished securities that felled western banks. The big three have raised substantial capital and strengthened their balance sheets, which they can now deploy to increase their businesses overseas.
One area where the plight of European banks has boosted the presence of Japanese banks is project finance, where European banks, led by Royal Bank of Scotland, had been particularly active.
MUFG was the top mandated lead arranger in global project finance deals in the first nine months of this year. SMFG was third and Mizuho, which ranked 21st only two years ago, was fourth, according to Reuters.
Norway’s Petroleum GeoServices is buying two new ships with $250m in loans from Japan Bank for International Co-operation and SMBC, reflecting the retreat of European banks from shipping finance.
The financial crisis that hit western financial institutions has also given Japanese banks a prime opportunity to cherry-pick assets of stricken banks, such as RBS.
MUFG’s rise to the top of the project finance league table owes much to its acquisition of RBS’s project finance business in Europe, the Middle East and Africa in 2010.
SMFG joined forces with other entities from the Sumitomo group to buy the British bank’s aircraft leasing business this year.
“It is an era in which things that would never be sold are being put on the market. This is the most wonderful thing,” says a gleeful senior executive at one of the big three.
While the woes of western banks have helped Tokyo’s big banks to make inroads globally, there is no disguising the pain they are feeling themselves. Japan has weak loan demand and high corporate savings.
Outstanding bank loans in Japan have fallen 13.5 per cent from a peak of Y493tn in 1997 to Y426tn last year, while deposits have grown 26 per cent over the same period, from Y475tn to Y599tn, the Bank of Japan says.
Margins are also being squeezed as banks compete for limited business. Mizuho’s return on domestic loans fell from 1.79 per cent in the first six months of 2008 to 1.33 per cent in the first quarter of this year.
The situation has forced Japanese banks to try to earn some returns on their funds by buying Japanese government bonds, which now make up as much as 22 per cent of MUFG’s total assets.
“Japanese banks’ biggest problem is that they have too much money, which is a terrible problem for a bank to have,” says Brian Waterhouse, bank analyst at CLSA in Tokyo.
. . .
This all makes the banks more eager to tap overseas markets for stronger demand and higher margins.
MUFG aims to increase net operating profits from its global businesses by 35 per cent in the year to March 2015 from Y265bn last year. SMFG is looking to raise the ratio of its overseas banking profits to 30 per cent of the total during the same period from 26 per cent at the end of this March.
The big banks are especially keen to develop their networks in Asia, where they have a long record and demand for financing is rising in line with economic growth. “Our competitiveness lies in Asia and our Asian customer base,” says Mr Hayashi at Mizuho, which has about half its 85 overseas offices and branches in the Asia-Pacific region.
Sceptics are quick to point out that Japan has been brashly confident about international business before, in the 1980s and 1990s, when it was similarly boosted by strong balance sheets and a high yen. But after Tokyo’s own crisis struck, Japanese lending overseas dropped from Y84.3tn at its peak in 1997 to Y13.5tn in 2004, according to BoJ statistics.
Bankers, however, insist they have learnt their lessons from earlier international forays.
“Back in the 1990s, Japanese banks did not look at the overall relationship between their risk and capital. They looked at each specific borrower very closely, but not the broader picture and took risks beyond the level of their capital, both inside and outside Japan,” says Norio Nakajima, a former executive of Mizuho who is now chief executive of Diam, an asset management company.
Furthermore, Japanese banks liked eye-catching deals back then but did not develop close ties to their borrowers. So, when the Japanese financial crisis hit, the easiest thing to do was to sell their overseas assets and go home, Mr Nakajima says.
Now, they have more sophisticated capital-based risk management and are also more focused on maintaining long-term relationships with overseas customers, he says. He adds that Japan’s banks are also putting greater emphasis on regional operations, offering assurances that they will not repatriate assets in tough times.
. . .
Nevertheless, analysts caution that there is plenty to worry about.
“One concern is that overseas deposits are not growing as much as their lending,” says Nana Otsuki, banking analyst at Bank of America Merrill Lynch in Tokyo. Unless they can boost their overseas deposits, Japanese banks will have to rely on more expensive and less stable funding from the capital markets. “If there is a concern, it is that dollar funding will dry up,” says one senior banker.
The ratio of non-performing loans, now comfortably in the low single-digits, would also be liable to rise if the global economy worsened. “The risk of default, we believe, is likely to increase from here on,” says Ms Otsuki.
The focus on project finance also has its risks since large infrastructure projects could face delays and regulatory issues, which require a high level of underwriting and risk management skills to manage successfully, says Naoko Nemoto, bank analyst at Standard & Poor’s in Tokyo.
Even if Japanese banks are able to better manage the risks they face, a key question is whether overseas lending can really compensate for their lacklustre business back home.
First, Japanese banks have focused on blue-chip companies to minimise risk but that keeps margins low.
Furthermore, with all three of Japan’s mega-banks desperate to expand lending overseas, there are already signs of over-competition. One banker complains that a competitor has been dumping loans, offering attractive interest rates that are below his own bank’s cost of capital.
The banks’ overseas businesses have been able to slow down the decline in their home margins but not reverse them, which was the intention, says Mr Waterhouse at CLSA.
In order to compete effectively, Japanese banks also need to globalise their operations more. MUFG’s overseas network of 519 branches and offices is the largest among the big three but is still a fraction of HSBC’s 5,661 offices outside the UK.
It is also striking that none of the three has any non-Japanese on its board. “Can they cross the Rubicon by making the structural transformation necessary to become global banks?” asks Ken Takamiya, bank analyst at Nomura.
Despite such concerns, the need to counter poor growth prospects back home will keep the pressure on Japanese banks to expand overseas. The eurozone crisis is also expected to last for several more years, providing Japanese banks with double-digit growth in overseas lending for some time to come, Mr Takamiya says. “By the time the eurozone crisis is over, the presence of Japanese banks overseas will be very different from today.”
Copyright The Financial Times Limited 2012
0 comments:
Publicar un comentario