Japan’s big banks, unburdened by heavy subprime losses, and stuck with sputtering growth at home, are once again investing and lending abroad, but investors should not expect a string of blockbuster buyouts. Only a few years removed from a bad-loan crisis that pushed many lenders to the brink of collapse and sparked widespread industry consolidation, Tokyo banks will continue to keep their acquisitions conservative, bankers and analysts say.
Recently, Sumitomo Mitsui Financial Group, Japan’s thirdlargest bank, said it would pay about €1.5bn to take a two percent stake in Britain’s subprime-scorched Barclays. This would inject funds needed into the market. Earlier this year Mizuho Financial Group injected €1.7bn into Merrill Lynch & Co. Although big news by recent standards, the deals are minor-league compared to the overseas shopping spree of the 1980s, when at one time Japan was estimated to control more than a quarter of California’s banking market.
Most of those investments were later sold as Tokyo faltered under mounting bad loans. Now that the subprime crisis hasasked questions of some western financial firms, Japanese bankers acknowledge they have a chance to rebuild overseas.
“We would of course consider investing in financials where capital has been depleted by the subprime,” Tatsuo Tanaka, Deputy President of the core bank of Mitsubishi UFJ Financial Group told reporters at a recent press conference. But Mr Tanaka acknowledged that Mitsubishi UFJ, Japan’s largest bank, would take a cautious tack in building up overseas. “There’s a difference between a financial investment and a strategic investment. Rather than looking to boost our shortterm profits, we would build a mid- to long-term relationship with a financial firm,” he said.
Top Mitsubishi UFJ bankers, including the president of the group’s main bank, have said the bank aims to take minority stakes in overseas firms, and then build business alliances. This would aid both Japanese, an western banks. Mitsubishi UFJ’s brokerage arm in April raised its stake in Singapore’s Kim Eng Holdings to about 15 percent. Together the two firms operate a joint venture in asset management.
The strategy of taking a small portion in an overseas firm – such as Sumitomo Mitsui’s two percent stake in Barclays – is too meek to deliver real results, said Kristine Li, Banking Analyst at KBC Securities in Tokyo. “It’s very typical Japanese style: first you put a little capital in and try to do some kind of tie-up,” Ms Li said in a recent interview with reporters.“I just don’t think it’s Western style and I don’t think it will really deliver anything significant.”
Dubbing the strategy as “typical Japanese” doesn’t bother Sumitomo Mitsui’s President, Teisuke Kitayama. “We (Japanese) are not big hunters. We are agricultural people,” he told a summer summit. “So far our tentative conclusion is to stay with the current, present investment. That’s it. And then sometime in the future we will decide whether we will make more investment or not.” The banks have agreed to tie up in areas such as private banking and overseas commercial banking. Sumitomo Mitsui will also consider other investments in the subprime-hit West, Mr Kitayama said.
While acquisitions abroad are likely to come at a slow pace, Japanese banks have been rapidly expanding overseas lending as they are able to step in to fund cash-strapped Western rivals. Sumitomo Mitsui saw loans outside of Japan rise 44 percent in the year to March 2008 from the previous year, with much of the growth in Europe and North Asia. Mitsubishi UFJ has said it is increasingly approached for bridge loans, a kind of short-term funding, overseas. Expanding overseas lending is critical for Japanese banks, because they face fierce competition and slack demand in the domestic market.
While Japanese banks have yet to once again take big overseas stakes, their renewed outward focus demonstrates growing confidence. “Arguably a single digit percentage doesn’t make much difference, but it’s the first step,” said Steven Thomas, Head of Mergers and Acquisitions for UBS in Japan. “Will we see some dramatic, large scale acquisitions overseas by financial services companies? In my own view, we may in the future but it will still take quite a long time until the stars will be aligned for that to happen.”