Japan's manufacturing industries have been enjoying record
profits thanks to a combination of stringent cost controls, growth in global
trade and a weakening yen. Yet, the banking industry remains under a cloud,
with the latest round of interim results -- announced this month -- producing a
very mixed bag in terms of performance.
The landslide victory of Prime Minister Shinzo Abe's coalition
in Japan's recent Lower House elections suggests that Abenomics is here to stay
for some years yet. Abe's success also makes it increasingly likely that Bank
of Japan Gov. Haruhiko Kuroda may be offered an unprecedented second term, if
he so wishes, when his current term officially ends in April 2018. Even should
he elect to step down, it is highly likely that his successor will be expected
to continue Kuroda's highly unorthodox monetary policies. This would mean both
short and long interest rates being maintained in a relatively tight band of
zero to negative 10 basis points, even if U.S. interest rates were to rise
further.
For the Japanese banks, this means further downward pressure on
domestic margins overall, while the continuing hyper liquidity seen for the
last few years -- not only in domestic financial markets but also in Japanese
corporate balance sheets -- suggests that one of the few remaining domestic
outlets for Japanese bank loans will likely be the property sector. Banks have
been down that slippery path several times before, and have suffered the
consequences of profligate lending.
It is by no means certain that they have fully learned the
lessons of history, but as long as interest rates remain at ultra-low levels,
everyone survives: the good, the bad and the terminally indebted. Only when
interest rates start to rise will it become immediately apparent who can repay
and who can not, and the rising tide of borrower insolvency is likely to take a
heavy toll on banks' meager domestic earnings. But that is a future problem for
Japan's domestic banking industry and not a current one.
Asia beckons
Meanwhile, internationally, new growth opportunities are limited
for Japanese banks. The long shadow of Brexit looms over London's long-term
future as the market's go-to choice for international financial transactions,
while recurring security concerns -- not to mention taxation and accessibility
issues -- will likely temper Japanese bank enthusiasm for further developing
their European networks.
Even in America, the abrupt exit by the U.S. from the
Trans-Pacific Partnership talks, and President Donald Trump's overriding
protectionist "America First" policy despite promising sweeping
infrastructure programs and tax reforms, suggest that inward investment by
Japanese banks, whether snapping up freight car leasing entities or taking
stakes in local banks, may no longer be viewed favorably even if Abe really is Trump's
new best friend.
All this leaves Asia as the de facto preferred choice for
Japanese financial institutions, not just for reasons of geographical
convenience but because of a vast, underbanked market of young Asians combined
with the current explosive growth in mobile phone penetration, digital payment
technology and the rise of Big Data. And within Asia, the biggest
economies of China and India still impose tough restrictions on foreign banks,
leaving Southeast Asia as the natural target for international
expansion.
Japanese banks have not been slow to grasp the importance to
their future revenues of the opportunity that Asia provides, especially in
countries such as Indonesia with a population of over 200 million but where
only some 36% of people have bank accounts. The three Japanese megabank groups
-- Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho
Financial Group -- have been particularly active since the global financial
crisis in 2008 in establishing beachheads across Asia, either through taking
ever-larger stakes in local banking operations or setting up joint ventures
with local financial institutions in such areas as leasing, payment systems and
micro-finance.
Low interest rates and slim pickings at home entice behemoths
into the region
Other Japanese city banks have tended to limit their Asian
operations to branch banking and/or minority stakes in local banks and
non-banks. Meanwhile, a whole slew of Japanese regional banks have been busy
setting up representative offices in Singapore over the last five years with an
eye on international "business matching," acting as go-betweens or
matchmakers to introduce their export-import customers to ideal partners in
other Asian countries in cooperation with local banks in the region. Even
Japanese credit card companies such as Credit Saison and ATM specialist Seven
Bank have been making inroads into the rapidly growing Indonesian, Vietnamese
and Cambodian electronic payment and microfinance markets in cooperation with
local partners.
To put this in some sort of perspective, total Japanese bank
lending to Southeast Asia has grown 75% in just the last five years to around
22.4 trillion yen ($198 billion), according to the Bank of Japan. Of this, the
three Japanese megabank groups have lent close to $172.7 billion, or just over
87% of the total. Yet this still does not exceed their total aggregate lending
into North America, which came to some $176.5 billion as of March 31 this year.
That may change if access to U.S.-dollar funding remains stable over the next
year or two. Asia is likely to be the beneficiary of Japanese banks' appetite
for high-yielding assets.
In the past Japanese banks have been rightly accused of being
followers rather than leaders in opening up financial markets, coming too late
to the party, missing low-hanging fruit, paying too much and having great
difficulty integrating their acquisitions on a profitable basis. No more. The
Japanese megabanks continue to be interested in taking strategic equity stakes
in prominent financial institutions across Asia, but they are generally much
more focused on long-term returns and the effective use of capital than they
were in the 1980s during the so-called Bubble Era when an "open checkbook"
policy prevailed over prudent banking.
Recent media reports in Japan suggest that Bank of
Tokyo-Mitsubishi UFJ, a subsidiary of MUFG, may be interested in acquiring
a stake of up to 40% in Indonesia's eighth-largest bank by assets, Bank Danamon.
While the banking group has yet to officially confirm the story, it is no
secret that Japanese banks have both the war chest and the desire to acquire
more strategic financial assets in Southeast Asia, in part a reflection of
slowing economic growth in China, a previous priority target market for
Japanese banks and manufacturers alike.
In 2013, MUFG spent some 170.6 billion baht ($5.15 billion) to
acquire a 72% stake in Thailand's fifth-largest bank, Bank of Ayudhya, and last
year acquired a 20% stake in Security Bank of the Philippines. Both are highly
profitable operations. Japanese banks have a long history of active involvement
in Indonesian financial markets; just last year Sumitomo Mitsui Banking Corp.,
part of SMFG, raised its stake in Bank Tabungan Pensiunan Nasional Tbk to 40%
and announced a jointly developed mobile phone-based payment app known as
Jenius as part of its long-term strategy to develop payment systems in
Indonesia and elsewhere in the region.
MUFG, arguably the most globally diverse of the Japanese
megabank groups, already derives around 40% of its net operating profit from
its overseas businesses. Management has set a target to achieve a 50% ratio
within the next three years. Acquiring a prized asset such as Bank Danamon
would go a long way toward achieving that goal.
While speculation continues to swirl as to whether Bank Danamon
is indeed up for sale to Japanese interests, one thing remains certain: While
interest rates remain low, profitable opportunities in Japan remain limited,
and access to offshore funding remains ample, Japan's major banks will continue
to actively seek out and acquire high-yielding financial assets -- both in Asia
and elsewhere overseas -- as long as those acquisitions remain an integral part
of their long-term strategy to become dominant players in the global financial
markets
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