Japanese banks become Wall Street’s unlikely saviours

Japanese banks become Wall Street’s unlikely saviours


Tokyo: Japanese banks, once criticised for a lack of financial creativity, have emerged as Wall Street’s unlikely saviours, but analysts say a culture clash may complicate their overseas expansion.

Japanese lenders are no strangers to financial crises, having only just escaped from their own bad debt quagmire stretching back to the recessions of the 1990s that required massive government bailouts of troubled banks.

Now, with the credit crunch transforming the global financial landscape, Mitsubishi UFJ Financial (MUFG) is buying up to 20% of Morgan Stanley, while top broker Nomura Holdings is snapping up bankrupt Lehman Brothers’ operations in Asia, Europe and the Middle East.

Investors welcomed the deals, with Mitsubishi UFJ shares rising 4.2% to end at 936 yen Wednesday. Nomura Holdings gained 5.2% to 1,505 yen.

“Japanese banks are lacking growth in their domestic market. Exposure to Western banks should offer them access to new markets and growth opportunities," said Jeremy Hall, director of Japanese equities at Henderson Global Investors in Singapore.

“The difficult thing will be the execution. Japanese companies have had a tendency to overpay for overseas acquisitions. Cultural issues will also be a factor. Japanese organisations are run in a very different way from Western banks. Quite how both sides learn to live with each other will be interesting."

Even the venerable Goldman Sachs, which until recently had largely escaped the worst of the credit crunch, is reportedly set to sell a stake to Sumitomo Mitsui Financial, Japan’s number three bank.

Sumitomo Mitsui is expected to invest “several hundred billion yen" in Goldman, Kyodo News reported, citing unnamed sources familiar with the matter. A spokeswoman for the Japanese bank said no such decision had been made.

But while Japanese banks appeared to have seized a golden opportunity, there are also worries about whether they will be able to make the tie-ups work.

For Mitsubishi UFJ, “the challenges will be formidable," predicted Credit Suisse banking analyst Shinichi Ina.

“MUFG’s corporate culture, which is conservative even by Japanese banking standards, clearly clashes with the aggressive profit-driven business culture of US investment banks," he wrote in a note to clients.

“Putting these two distinctive profit-driven business cultures together in the same group may generate synergies, but it also harbours considerable risks of inefficiencies and a failure to live up to expectations."

Analysts pointed out that Japanese banks have limited experience in the specialised activities in which Wall Street giants are involved.

“Japanese banks have not been doing real investment banking," said Standard and Poor’s analyst Naoko Nemoto. “They don’t have know-how. They may try to learn it but it’s not a very good time to start."

MUFG, which will invest up to $8.5 billion in Morgan Stanley, said it will send at least one executive to sit on the US bank’s executive board.

While Japanese banks have not escaped unscathed from the current financial turmoil triggered by a wave of defaults of high-risk US mortgages, they have fared better than many foreign peers due to conservative business strategies.

As foreign banks racked up bumper profits in recent years thanks to exotic financial instruments and risky bets on high-risk subprime assets, Japan’s top lenders came under fire for not being bold enough with their investments.

“Japanese banks weren’t conservative because they were smart. They were conservative because they had no choice," said Hall at Henderson Global Investors.

“However, the issue is not whether they were smart or lucky, rather it is that they are now in a relatively strong position."