Japan’s mega-banks have big Asian ambitions

News two of Japan’s mega-banks, Sumitomo Mitsui Banking Corp and Mitsubishi UFJ, are stalking the American operations of French bank BNP Paribas may have caused ripples in American banking but it would be no surprise to Asians.

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The major Japanese banks are causing waves in the region not seen since their glory days in the late eighties and early nineties, before the deflation of Japan’s bubble economy wrought havoc on the main institutions.

Ironically, what’s driving the regional – and global – ambitions of the Japanese is exactly the opposite of two decades ago. Then, flush with inflated assets and official encouragement, the Japanese surfed an inflated economy across the region.

Today, two decades of near stagnant domestic growth, exacerbated by the financial crisis and still not offset by the nascent improvement of “Abenomics”, the banks must look offshore if they are to grow at all.

So the megabanks, Sumitomo, Mitsubishi and Mizuho Financial Group and Nomura, have been expanding their offshore activities, bidding for loan syndications, funding investment firms and even buying other banks.

In reporting strong net profits for the fiscal year ended March 31, the banks cited international lending as a key driver. And they emphasised growth in Asia will remain a major focus.

"Asia will be the centre of our business given its growth potential," Sumitomo Mitsui president Koichi Miyata said after the results.

Sumitomo reported loans to other Asian nations growing a fifth to Yen 4.9 trillion while overseas lending accounted for 25 per cent of all loans, up from 21 per cent a year earlier. Other big banks reported similar numbers.

In Hong Kong two weeks ago, catching up with bankers from ANZ and elsewhere, the discussion I heard most frequently was the role of the Japanese banks.

Alongside the lack of domestic opportunities, one of the other factors is the Japanese banks are awash with funding. Indeed, in Asia, money printing by the Bank of Japan is a more significant factor than the US Federal Reserve’s “tapering” of its own quantitative easing program.

This money is flowing most immediately into the Japanese banking system. Internal market reports by one intelligence bulletin in Hong Kong estimated asset growth in the region of 25 per cent last calendar year with similar growth forecast for this year.

The phenomenon is so pronounced the International Monetary Fund recently produced a working paper “Cross-border Activity of Japanese Banks” by W. Raphael Lam. 

The paper examined “the determinants of Japanese banks’ overseas expansion and assesses whether the growing cross-border activity will continue under the new macroeconomic policies referred as ‘Abenomics’”.

It's conclusion was clear:  Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and continued growth in the region. The bad debt hangover of the bubble has worn off.

“Stronger domestic growth in Japan could mitigate the pace but is unlikely to reverse the expansion as global and regional pull-factors play a more prominent role in the growth of cross-border claims,” Lam found.

However “increasing cross-border activity could pose funding risks and supervisory challenges and require continued close monitoring”.

In the nineties, when the Japanese banks were last such a powerful force, the repercussions were much tighter competition for lending assets – and intense margin pressure – in Australia as well as Asia but the Japanese banks didn’t broaden their business mix.

That historically has been the case. The mega-banks and their predecessors tended to bid opportunistically with excess funding but otherwise look after the – immense – business of Japanese trading and industrial companies.

This latest wave started to take off around 2010 but has been gathering pace for nearly a decade. According to the Bank for International Settlements lending to South East Asia by the Japanese has now passed the 90s peak. Lending to South East Asia hit a record $US195 billion in 2013, up a third on a year earlier.

Japan’s major business publication, the Nikkei, wrote recently “for Japanese banks, Thailand, Indonesia and other Southeast Asian nations are an untapped El Dorado”.

“With year-on-year lending growth at the 10 per cent level in Thailand and 20 per cent in Indonesia, the region looks like a high-growth lending market to Japanese banks, which have long suffered slow growth in lending,” the Nikkei said.

“Western banks are unlikely to see an increase in lending in an era of deleveraging while Chinese banks, which have enjoyed rapid growth, are expected to face sharp deterioration in their lending environment in the next few years.”

The Nikkei compared Asian margins with Japan saying while margins were 1.0-1.5 per cent in Japan, they were around 3 per cent in Thailand and 3-4 per cent in Indonesia where (one bank's) margin was a hefty 12 per cent.

“Southeast Asia's dynamism is like Japan's at the height of the economic boom, when the more banks ballooned their assets the more profits they earned,” the Nikkei concluded.

ANZ’s Financial Institutions Group director in Japan Hiroshi Toyoshima says the mega-banks have also been active in the derivative and currency businesses, the less capital intensive fee streams where more banks want to swim.

He notes the “Japanese premium” – an extra cost levied on Japanese banks looking to raise funding after the bubble collapsed and, especially, after a Japanese financial crisis in the late 90s - has now unwound.

“Japanese megabanks have expanded their overseas activities backed by strong balance sheets and due to soft domestic loan demand since 2005,” he says. “For example, the total share of the three megabanks for their syndicated loan business in Asia outside of Japan rose to 15.5 per cent just during the first quarter in 2014. The three banks provided about $US1.8 billion in operating capital to Henderson Land Development in Hong Kong, in cooperation with other banks, while Sumitomo Mitsui and Mizuho took part in a syndicated loan of around $US2.5 billion for a Singapore-based agricultural trading house.”

The re-emergence and diversification of Japanese banks in Asia is already a major structural and competitive factor in the region. And not just for foreign banks: regional Japanese banks, which tend to bank Japan’s huge commercial sector, are wary of losing their domestic customers to the mega-banks as those customers expand in the region without them.

Toyoshima notes while Japanese megabanks generated over 30 per cent of their total revenue from overseas, Japanese regional banks have been suffering weak local economies due to declining populations and limp loan growth.

“They are slowly adapting more expansive overseas investment policies to invest offshore beyond a Japanese connection,” he says. “The trend decline in their loan-to-deposit ratios to below 68 per cent (reflecting weak loan growth) will continue unless they expand overseas activities.”

While it is early days for regional Japanese banks, which will initially face domestic rationalisation as regulators worry they need to merge to survive, Japanese insurance companies are also expanding in the region.

Meanwhile, the IMF’s Lam notes “higher overseas exposures may add to funding risks that would require continued close monitoring by supervisory authorities”.

“Securing stable and long-term dollar funding has remained a risk for Japanese financial institutions,” he found. “At the same time, overseas activities add to challenges on cross-border supervision for financial institutions. Overseas expansion by Japanese financial institution is welcome but would warrant a gradual and cautious approach in light of earlier episodes in the late 1980s and 1990s.”

They may no longer be the world’s biggest banks but the banks of Japan are once again a major force in the region.

Illustration: Chris Kelly. Corporate caricatures & illustrations.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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