U.S. Financial Crisis a Boon For Japanese Banks

For global investors, there may be a glint of hope in recent events: the crisis in the U.S. financial sector may serve as a long-awaited boon for Japan’s “megabanks”.

For many years, banks such as Mizuho Financial (MFG), Mitsubishi UFJ (MTG) and Sumitomo Mitsui Financial (SMFJY.PK) have been stuck in a stagnant domestic growth cycle that has limited the extent to which they have been able to compete at the aggressive level of their U.S. counterparts. Many employees at Japan’s Nomura (NMR) talk of a stifling, hierarchical culture that has so far led to a disproportionate number of that investment bank’s biggest rainmakers seeking out jobs at higher-paying hedge funds.

Thanks to the financial sector crisis in the U.S., some of those problems may be about to change. What’s more, investors willing to take the risks may be able to get in what amounts to the ground floor of the next boom in the Japanese investment banking industry.

In recent years, growth has been sluggish at Japan’s megabanks. At around $8, ADRs in Mitsui UFJ are going for the same price they were back in the summer of 2004; Mizuho is trading around half its 2004 valuation; after a brief lift-off, ADRs in Nomura are back at 5-year lows.

Some of this is due to perceived hostility to foreign investment among Japanese companies, at the same time as China’s big banks have opened the floodgates to American and European fund managers looking to get a slice of the Asian growth equation.

That may be about to change. In recent days Japanese banks have shown uncharacteristic savvy and aggression in competing for the U.S. assets of their market counterparties. Making the headlines was Mitsubishi UFJ’s $8.4 billion acquisition of around 20% of Morgan Stanley (MS). That makes Mitsubishi look decidedly savvier than China’s private sovereign fund (earlier in the year, China Investment Corporation, a $200 billion acquisition giant, snapped up 10% of the bank for around $5.5 billion).

Nomura is picking at slices of Lehman Brothers, days after Barclays looked like it was the only international investment bank in the bidding, with a $1.75 billion offer for the U.S. business. Sumitomo Mitsui Financial, which invested $901 million in Barclays (BCS) in July, is also said to be sniffing around the Lehman carcass.

Mizuho Financial is strengthening ties with the new Merrill-BoA conglomerate, after having invested $1.2 billion in Merrill (MER) in January this year.

A basket of four or five Japanese banks – at valuations close to, or at 5-year lows – looks like a savvy buy right now, for this may be the only safe and effective way for U.S. financial institutions to get a spread of risk in an ultra high-growth regional economy.

Japanese banks have benefited from increasing synergy with their U.S. competitors, while they arguably understand the risk management side of the business better than anyone else today.

With the last two U.S. investment banks, Morgan Stanley and Goldman Sachs (GS), now wrapped up in increasing regulation as a result of becoming bank holding companies, Japanese counterparty banks may be the ideal proxy in which U.S. banks can get a footing in the higher risk-reward return environment that has traditionally provided for the huge bonuses that keep them competitive on the global stage.

Disclosure: No positions held in any stocks mentioned.

Comments

[ZagnZig:]

"For many years, banks such as Mizuho Financial (MFG), Mitsubishi UFJ (MTG) ..."

Neither of these ticker symbols are accurate. How does an investor in US exchanges participate?
Thanks

2008 Sep 25 07:02 AM