MUFG’s first foreign board members stood on stage alongside career insiders at the Japanese bank’s annual shareholder meeting, part of its charm offensive to reassure investors it can manage its burgeoning international operations.
The new board members – Toby Myerson, a US acquisitions lawyer, and Tarisa Watanagase, a former governor of the Bank of Thailand – are supposed to provide the extra skills and experience needed to help crank up MUFG’s expansion into overdrive.
They are also the public face of change at Japan’s largest bank by assets. MUFG, known for its conservatism, is hunting for a commercial bank in the US, another commercial bank in Southeast Asia, and an asset manager to bolster its unit Mitsubishi UFJ Trust & Banking Corp.
“We may use our excess capital for further strategic investment or acquisitions in those three areas,” MUFG’s chief financial officer Muneaki Tokunari told FinanceAsia in an interview. Tokunari spoke during a break from meetings in Hong Kong with investors on MUFG’s expansion strategy.
MUFG already boasts the biggest presence overseas amongst its Japanese megabank peers, Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group.
And it wants to maintain that lead. According to a person familiar with the matter, MUFG expects overseas sales to generate half of the bank’s revenues within five years, up from 40% currently.
But big is not necessarily beautiful for equity investors and MUFG, Japan’s second-largest publically traded company, is quoted at a price-to-book ratio of just 0.61 versus the 1.06 attributable to the MSCI world benchmark index of banks across developed markets.
Part of the reason for that is that investors are well aware that banks can often struggle to compete against local incumbents and to manage foreign employees.
Tokunari is pretty open about the issue.
“We are not optimistic,” he said. “Always we are asking ourselves what is our weak point, how can we get the necessary expertise.”
Also, many grizzled investors in Japanese financial institutions think they have seen this story before.
Japanese brokerage house Nomura saw its costs soar and senior staff leave after taking over parts of Lehman Brothers in 2008. Nomura’s international operations lost about ¥305.1 billion ($2.79 billion) between March 2010 and March 2016, the broker’s annual reports show.
Older investors recall the undisciplined global real estate lending splurge of Japanese banks in the 1980s that ended in a number of bankruptcies.
When reminded of this, Tokunari sighed and said he had often heard the refrain when talking to investors: “Are you really confident to continue to grow, even as a Japanese bank?”
Margin crunch
What many foreign investors don’t know is that one of the biggest pitch battles facing MUFG’s top management is internal.
History is partly to blame. The Bank of Tokyo, which for decades saw itself as a conduit for Japanese companies expanding overseas, merged with the very conservative domestic lender Mitsubishi Bank in 1996 to form Bank of Tokyo-Mitsubishi UFJ. Unlike at rival Mizuho where no faction clearly dominated after a round of mergers, executives from Mitsubishi Bank have dominated decisions at MUFG ever since.
Japanese commercial banks have tended to look down on their securities arms in the past, almost the opposite attitude to Western banks where flashy traders and wheeler-dealer investment bankers were for a long time vaunted – at least until the global financial crisis.
“We, MUFG, are in a sense a little bit conservative,” said Tokunari, who joined the group in 1982 and has risen through the ranks.
Such attitudes have helped to shape Japanese banks’ growth overseas.
They have muscled into syndicated loan markets, an area where they traditionally feel comfortable since the credit exposure is backed by some form of collateral.
In many cases they have won market share by undercutting rivals. For example, MUFG charged more than five times less on its Asia-Pacific syndicated loans between 2009 and 2016 than Britain’s HSBC, one of the banks with the largest footprints across the region, according to data provider Dealogic and consultancy Quinlan & Associates.
As a result MUFG climbed the banking league tables and in 2016 was No. 6 globally in terms of syndicated lending volumes and No. 1 in project finance, according to data provider Dealogic.
But risk-averse lending and high volumes do not necessarily translate into bumper profits in these relatively low margin products.
So in response Japan’s megabanks are trying to cross-sell investment banking services that are higher risk and higher reward for the client, more cyclical in nature and profitable for the bank. In short MUFG needs to build on the cosmopolitan legacy of Bank of Tokyo, raise the status of its securities arm and all the while maintain harmony, or “wa” in Japanese, between the bank’s factions.
MUFG rival SMFG has told FinanceAsia that it plans to hire 250 people over the next three years to boost the overseas investment banking business of its SMBC Nikko unit. It is targeting an improvement in SMBC Nikko’s gross profit in the US and Europe to about ¥50 billion by 2020 from around ¥30 billion in the financial year just ended.
The other megabank, Mizuho, agreed to buy RBS’s $36 billion loan portfolio in the US and Canada in 2015, giving it access to 70 more corporate clients. It is now trying to cross-sell more bonds to its loan clients globally, according to one of its senior bond bankers.
Most analysts and consultants agree that these are potentially very smart moves.
“Through rebalancing their interest and non-interest income streams to be more in line with rival global universal banks, we feel each of the megabanks has the potential to earn an additional $1.5 billion to $2.5 billion in annual revenue within five years,” Benjamin Quinlan, chief executive of consultancy Quinlan & Associates, said in a report.
But such an undertaking is easier said than done due to cultural issues.
Mizuho for one had to launch a “One Mizuho” policy three years ago to meld together its querulous divisions. SMFG belatedly announced a similar strategy in June to organise its various units under one holding company.
One senior MUFG bond banker in Asia told FinanceAsia his biggest battle was convincing colleagues in the commercial banking division to allow his team to go on joint visits to “their” clients.
Such loan bankers, often dubbed “relationship bankers”, in many cases have serviced the same corporate clients for decades and are often loathe to sell them riskier products for fear it could blow up in their faces.
Undaunted, the bond banker says he is selling his story internally of how his products will boost the bank’s return on equity.
“For every $1 of bonds sold it creates $2 to $3 dollars in hedging and trading revenue for the commercial bank,” he said chirpily.
He also touts his success in India, where he has upsold bonds to about 60% to 70% of the bank’s loan customers in the country.
The bond banker aims to cross-sell bonds to 50% of the bank’s loan customers within a year, with a focus on Indonesia where MUFG has a strong commercial banking footprint.
He has the top executive support. In a symbolic move the bank’s main lending arm, Bank of Tokyo-Mitsubishi UFJ (BTMU), will be renamed MUFG Bank, to try and break down the barriers between the main corporate lending arm of MUFG and other parts of the bank.
Having “Tokyo” in the signage also does not fit with the executives vision of the bank moving away from being a Japanese commercial bank and becoming a global financial institution.
Leg up
Cross-selling products to BTMU’s existing client base could well give the Japanese megabank a leg up in the fierce battle for debt capital market mandates, especially when Chinese banks are also aggressively expanding into corporate finance.
The likes of India’s ICICI Bank and Export-Import Bank of China (Chexim) are already open to including MUFG in their debt syndicates, its bond bankers have found, even though the Japanese bank lacks a long track record in bond deals. The only proviso is that they might have to offer a “sweetheart” fee for any first deal until they can prove their ability to attract global investors to the bonds
MUFG is also counting on collaboration on another front: Morgan Stanley. MUFG injected $9 billion into the Wall Street firm in 2008 for a 22% stake. Since then the two banks have collaborated successfully in acquisition finance.
“M&A advisory is still handled by Morgan Stanley but we could provide the balance sheet; loans, transaction banking, derivatives, many products,” Tokunari said.
“We are increasing joint visits to Asian customers,” he added.
As an example MUFG is partly bankrolling the acquisition by Chinese investors of Global Logistics Properties (GLP), according to people familiar with the deal. It is the largest-ever private equity buyout in Asia.
BTMU could not act fast enough to secure a role as arranger of the debt, which would have meant higher fees, despite being invited into the process at an early stage. But the bank felt comfortable enough to help finance a leveraged buyout because it had leant to GLP before and the borrower has a substantial presence in Japan, a person familiar with the deal process told FinanceAsia.
Elsewhere, Bank of Ayudhya, MUFG’s Thai unit, last year began selling mutual funds provided by Morgan Stanley investment services.
However, this cooperation has limits. A bond market source noted that Morgan Stanley has laid claim to 39 clients in Asia that limits MUFG’s ability to serve them. The client list includes some of Asia’s most prestigious companies such as Hong Kong-headquartered conglomerate CK Hutchison Holdings.
As one banker at Morgan Stanley put it: “On the bond side, these guys are competitors … on a very small subset of names where we cooperate on the lending side, we share fees with them. Outside of that, they’re trying to do their own thing, we’re doing our own thing.”
Changing identity
As part of its global push and to break down internal barriers, MUFG is seeking to localise management – a big shift for a bank founded by a former samurai in 1880. It named Stephen Cummings as its first US head of operations in the Americas in 2015.
“Previously we seconded a Japanese guy, but it is quite tough to manage US people frankly,” said Tokunari, who is a director at MUFG’s US unit Union Bank.
Such diversity efforts do not extend yet to gender. Mariana Ngan, head of Hong Kong and non-Japanese customers in Greater China, became the first woman at MUFG to reach the rank of executive officer in May last year. But there still isn’t a woman in the bank’s top tier of management, a fact bemoaned on employee review site Glassdoor.
Policy decisions are also still largely made in Tokyo and executives from around the world need to make their case heard with frequent visits to headquarters. Randall Chafetz, the first non-Japanese Executive Officer in BTMU history, is one of the very few foreigners sat on the executive floor at Tokyo HQ, and he does not yet speak Japanese fluently, according to bankers who know him.
The bank is also hiring big-name investment bankers. It poached Siong Ooi from Bank of America Merrill Lynch to head its loan markets and syndications business in Asia Pacific and Vivian Sam from Citigroup to work on acquisition finance.
But really MUFG has realised that the seeds of success are planted well before it buys an overseas asset. So to minimize culture clashes MUFG studies potential acquisition targets to make sure they are the right cultural fit within the group.
Tokunari said MUFG spent more than two years getting to know each of the companies it eventually acquired in Asia. That includes the controlling stake it bought for $5.6 billion in 2013 in Bank of Ayudhya, the 20% stake in VietinBank it snapped up in 2012, and the 20% stake it bought last year in the Philippines’s Security Bank.
He said preparing for an acquisition was akin to planning a marriage. In response to a question whether the bank is currently dating he quipped: “We’re still at the saying hello stage”.
Hunt for dollars
To boost their overseas margins the Japanese megabanks are also seeking to reduce their cost of funding.
In Japan, MUFG is flush with cheap yen deposits but foreign-denominated deposits have not kept pace with the bank’s swelling overseas loan portfolio. Deposits cover only 60% to 70% of non-yen loans while medium-term notes and cross-currency swaps that have two- to five-year tenors cover the rest.
The cost of yen-funded dollar buying rose between 2014 and 2016. “That is one reason we would like to expand in the US further, [as] we need US dollar funding,” said Tokunari. “There are many lending opportunities but we don’t have any US currency.”
One way is to buy a US commercial bank and the other is to grow Union Bank. MUFG is pursuing both avenues.
Union Bank launched an online bank in February called Pure Point, which has amassed far more dollars than MUFG had expected, Tokunari said.
Still funds are short. So Japan’s megabanks will likely step-up Total Loss-Absorbing Capacity, or TLAC, bond issuance in dollars to lengthen their debt maturities and reduce refinancing risk.
Tokunari is used to dealing with such funding challenges and coming up with creative solutions.
When MUFG agreed to inject Morgan Stanley with fresh capital in 2008, Tokunari was the group treasurer and tasked with making the payment – on a bank holiday.
So he asked his juniors in New York to write a $9 billion cheque and physically deliver it to Morgan Stanley, a gesture that staunched panic selling of investment banks.
Too big to fail
The truth is MUFG and its peers have no choice but to expand overseas. Japanese banks have been struggling with negative interest rates in their domestic market since early 2016, compounding the pain caused by sluggish demand for loans from their corporate clients.
“We are now discussing how to streamline domestic operations to cope with many headwinds; it is quite tough for us to increase domestic revenues,” Tokunari said, noting MUFG’s plans to cut costs by ¥120 billion ($1.1 billion) in the coming years, almost entirely in Japan.
Given their size, the importance of Japan’s megabanks getting their overseas expansion right does not just concern their stakeholders, it also poses a risk to the global financial system.
The Financial Stability Board labeled all three megabanks as global systemically important financial institutions back in 2011 and their overseas lending has only continued to balloon since then.
The consolidated foreign claims of Japanese banks grew to $3.94 trillion by the end of 2016 from $2.403 trillion on March 31, 2008. This made them the world’s largest international lenders, overtaking German banks in 2011.
“Based on their 2017 guidance, none of the megabanks expect a major slowdown in the growth of overseas lending,” said JP Morgan equities analyst Rie Nishihara. She estimates that overseas lending this year will grow by a high single-digit percentage at MUFG, and by 5% at SMFG and 3% to 4% at Mizuho.
So, reading the tealeaves, it seems that despite dropping “Tokyo” from the Bank of Tokyo-Mitsubishi UFJ lending arm’s signage, the international spirit of the bank founded in 1880 will live on.
