Jones Lang LaSalle
Japan's Banks: A Better Bottom Line
The turnaround at Mitsubishi UFJ is a strong sign that the worst is over for the sector, which still has plenty of catching up to do globally.
He heads the world's biggest financial group, with 40 million personal accounts and more than $1.65 trillion in assets. Despite all that responsibility, Nobuo Kuroyanagi, 64, CEO of Mitsubishi UFJ Financial Group is remarkably relaxed. That's because his bank, the result of the recent merger of Mitsubishi Tokyo Financial Group and UFJ Holdings, is firmly on the road to recovery after a troublesome decade for Japan's financial sector.
Earnings through the six months to September, 2005, were $6.1 billion and are expected to reach $12.6 billion for the year through March, according to Nikko Citigroup, vs. a $1.8 billion loss last year. And while those first-half profits benefited from several one-time accounting measures, the bank's stock has risen 51% in the last 12 months.
NEXT STOP. That's a remarkable turnaround. Just three years ago, Japan's government ordered the nation's biggest banks, including the two that became Mitsubishi UFJ, to halve their bad loan portfolios within two years. The tough medicine was necessary. Having made trillions of yen in ill-judged loans during the bubble years, Japan's big banks had failed for a long time to get tough with ailing companies until the government stepped in and told them to sort out the mess.
Now, the test for Mitsubishi UFJ is to transform itself from a recuperating behemoth into a truly global bank that can compete alongside the likes of giants such as Citigroup (C ) and HSBC Group (HBC ). Following the merger of MFTG and UFJ, Mitsubishi UFJ is now among the world's biggest five banks in terms of market capitalization, but analysts say it must boost profits if it's to rank alongside the world's leading lenders.
"We'd like to become one of the global top five banks," Kuroyanagi told BusinessWeek in a recent interview at Mitsubishi Financial's Tokyo headquarters. "To do that, we'll build a first-class retail operation in Japan and then expand internationally."
BILLS STILL DUE. Mitsubishi UFJ faces its share of challenges. For one thing, catching up with the leaders won't be easy. Citigroup posted earnings of $24.6 billion for 2005. Mitsubishi UFJ has yet to announce results for the final quarter of 2005, but for the three months to last September, Citigroup's profits exceeded those of Japan's top six banks' combined. Similarly, the return on assets for Japan's six biggest banks runs about half of what the U.S. giant manages.
One reason for low profits is that years of bad loans limited investment at home and forced Japan's banks to scale back overseas operations. Plus, Japan's banks have historically focused on providing cheap loans to corporations, often at the expense of potentially more profitable retail banking.
Another concern is that Japan's banks still need to repay public funds they received during the worst days of the banking crisis. Mitsubishi UFJ, for example, owes the government $7 billion, even after paying back $2.7 billion in October and $2.6 billion in December. The bank is unlikely to finish repaying the government before 2007.
ASIAN FOCUS. Fellow megabanks such as Mizuho are in the same boat. "Their earning power is much improved, but since the banks still have to repay the public funds back to the government they're limited in how they can use their capital," says Junsuke Senoguchi, bank analyst at Lehman Brothers in Tokyo.
Still, some signs indicate that the banking comeback will continue. Deregulation of the Japanese financial sector, including measures to allow banks to sell securities at branches and, from 2007, offer a full range of insurance products, should help increase profitability at home. The prospect of higher interest rates in Japan later this year will also improve the picture.
And Mitsubishi UFJ is expanding overseas to build business among Japanese companies investing heavily in the rest of Asia. "We have business with most of those Japanese companies," Kuroyanagi notes. The bank has three branches in India, it opened a new office in Shenyang in June, and has launched an investment-banking operation in Singapore to help drum up new business across the region.
"ONLY REALISTIC OPTION." Mitsubishi UFJ is also searching for a banking partner in China, where Japanese companies are investing billions of dollars. The Japanese media recently reported that the bank is in talks with Bank of China (BOC), one of China's Big Four banks, about a $300 million investment. Kuroyanagi declines to confirm details, but he admits that his bank has a good relationship with BOC and that an alliance would help serve multinationals forming joint ventures in provincial Chinese cities where Mitsubishi UFJ doesn't have branches.
Such an investment would be a smart strategy. Analysts say rival banks are already making aggressive moves in China and that Japanese banks risk falling behind. In January, for instance, Britain's Royal Bank of Scotland completed a deal to take a 10% stake in BOC. "It's very natural for [Mitsubishi UFJ] to have an interest in taking a stake in a Chinese bank, and Bank of China is a very good bank," says Hironari Nozaki, bank analyst at Nikko Citigroup in Tokyo.
Stronger Asian operations are also the most likely source of longer-term profitability. Analysts question whether Mitsubishi UFJ, along with other Japanese banks, will be successful at persuading conservative Japanese account holders to increase their use of higher-margin financial products, such as high interest consumer-finance loans. Opportunities for growth in the competitive markets of Europe and the U.S. also look limited. "Asia is the only realistic option for good returns," says Lehman Brothers' Senoguchi.
In any case, Kuroyanagi reckons Asian expansion will bring a different kind of U.S. customer -- multinationals that are expanding in Asia. No matter what the client's nationality, "we want to be the No. 1 bank in Asia [for multinationals doing business in the region]," he says. Even if that takes a few years, the grim days of Japanese banking's lost decade are being left behind.
Japan's Banks: A Better Bottom Line
The turnaround at Mitsubishi UFJ is a strong sign that the worst is over for the sector, which still has plenty of catching up to do globally.
He heads the world's biggest financial group, with 40 million personal accounts and more than $1.65 trillion in assets. Despite all that responsibility, Nobuo Kuroyanagi, 64, CEO of Mitsubishi UFJ Financial Group is remarkably relaxed. That's because his bank, the result of the recent merger of Mitsubishi Tokyo Financial Group and UFJ Holdings, is firmly on the road to recovery after a troublesome decade for Japan's financial sector.
Earnings through the six months to September, 2005, were $6.1 billion and are expected to reach $12.6 billion for the year through March, according to Nikko Citigroup, vs. a $1.8 billion loss last year. And while those first-half profits benefited from several one-time accounting measures, the bank's stock has risen 51% in the last 12 months.
NEXT STOP. That's a remarkable turnaround. Just three years ago, Japan's government ordered the nation's biggest banks, including the two that became Mitsubishi UFJ, to halve their bad loan portfolios within two years. The tough medicine was necessary. Having made trillions of yen in ill-judged loans during the bubble years, Japan's big banks had failed for a long time to get tough with ailing companies until the government stepped in and told them to sort out the mess.
Now, the test for Mitsubishi UFJ is to transform itself from a recuperating behemoth into a truly global bank that can compete alongside the likes of giants such as Citigroup (C ) and HSBC Group (HBC ). Following the merger of MFTG and UFJ, Mitsubishi UFJ is now among the world's biggest five banks in terms of market capitalization, but analysts say it must boost profits if it's to rank alongside the world's leading lenders.
"We'd like to become one of the global top five banks," Kuroyanagi told BusinessWeek in a recent interview at Mitsubishi Financial's Tokyo headquarters. "To do that, we'll build a first-class retail operation in Japan and then expand internationally."
BILLS STILL DUE. Mitsubishi UFJ faces its share of challenges. For one thing, catching up with the leaders won't be easy. Citigroup posted earnings of $24.6 billion for 2005. Mitsubishi UFJ has yet to announce results for the final quarter of 2005, but for the three months to last September, Citigroup's profits exceeded those of Japan's top six banks' combined. Similarly, the return on assets for Japan's six biggest banks runs about half of what the U.S. giant manages.
One reason for low profits is that years of bad loans limited investment at home and forced Japan's banks to scale back overseas operations. Plus, Japan's banks have historically focused on providing cheap loans to corporations, often at the expense of potentially more profitable retail banking.
Another concern is that Japan's banks still need to repay public funds they received during the worst days of the banking crisis. Mitsubishi UFJ, for example, owes the government $7 billion, even after paying back $2.7 billion in October and $2.6 billion in December. The bank is unlikely to finish repaying the government before 2007.
ASIAN FOCUS. Fellow megabanks such as Mizuho are in the same boat. "Their earning power is much improved, but since the banks still have to repay the public funds back to the government they're limited in how they can use their capital," says Junsuke Senoguchi, bank analyst at Lehman Brothers in Tokyo.
Still, some signs indicate that the banking comeback will continue. Deregulation of the Japanese financial sector, including measures to allow banks to sell securities at branches and, from 2007, offer a full range of insurance products, should help increase profitability at home. The prospect of higher interest rates in Japan later this year will also improve the picture.
And Mitsubishi UFJ is expanding overseas to build business among Japanese companies investing heavily in the rest of Asia. "We have business with most of those Japanese companies," Kuroyanagi notes. The bank has three branches in India, it opened a new office in Shenyang in June, and has launched an investment-banking operation in Singapore to help drum up new business across the region.
"ONLY REALISTIC OPTION." Mitsubishi UFJ is also searching for a banking partner in China, where Japanese companies are investing billions of dollars. The Japanese media recently reported that the bank is in talks with Bank of China (BOC), one of China's Big Four banks, about a $300 million investment. Kuroyanagi declines to confirm details, but he admits that his bank has a good relationship with BOC and that an alliance would help serve multinationals forming joint ventures in provincial Chinese cities where Mitsubishi UFJ doesn't have branches.
Such an investment would be a smart strategy. Analysts say rival banks are already making aggressive moves in China and that Japanese banks risk falling behind. In January, for instance, Britain's Royal Bank of Scotland completed a deal to take a 10% stake in BOC. "It's very natural for [Mitsubishi UFJ] to have an interest in taking a stake in a Chinese bank, and Bank of China is a very good bank," says Hironari Nozaki, bank analyst at Nikko Citigroup in Tokyo.
Stronger Asian operations are also the most likely source of longer-term profitability. Analysts question whether Mitsubishi UFJ, along with other Japanese banks, will be successful at persuading conservative Japanese account holders to increase their use of higher-margin financial products, such as high interest consumer-finance loans. Opportunities for growth in the competitive markets of Europe and the U.S. also look limited. "Asia is the only realistic option for good returns," says Lehman Brothers' Senoguchi.
In any case, Kuroyanagi reckons Asian expansion will bring a different kind of U.S. customer -- multinationals that are expanding in Asia. No matter what the client's nationality, "we want to be the No. 1 bank in Asia [for multinationals doing business in the region]," he says. Even if that takes a few years, the grim days of Japanese banking's lost decade are being left behind.
posted by Jones Lang LaSalle NJ News Blog at 12:10 PM
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