Japan’s Megabanks Are Flush With Cash and Hunting Overseas Deals #JapanFinance

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Japan’s megabanks are awash in cash and eager to invest.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are enjoying record earnings. Selling off cross-shareholdings is bringing in even more money. Even as they reward shareholders with buybacks and higher dividends, they are determined to fund overseas expansion.

Their primary focuses are on the US and India, respectively the world’s largest economy and the fastest-growing. While the banks have had a presence in the two countries for decades, this year has seen a fresh push in investment and hiring. Buying stakes in local companies also puts their excess funds to work as the banks are under pressure from the Tokyo Stock Exchange to boost their valuations.

“Their investment strategy including M&A is key to whether the banks can reach the next level of growth,” said Nana Otsuki, a senior fellow at Pictet Asset Management Japan Ltd. “Given their price-to-book ratios still aren’t comfortably above one, it’s a priority to better utilize their capital.”

All of the companies have more cash on their balance sheets than their target common equity tier 1 ratios and have plans to reduce their strategic holdings over the next several years. MUFG aims to cut its stakes in clients by at least 700 billion yen ($4.7 billion) by March 2027. SMFG has a similar plan to dispose of 600 billion yen in such holdings by March 2029 and Mizuho’s aim is to reduce its cross shareholding by 300 billion yen by March 2026.

“We are now moving from the stage of capital buildup to the stage of striking a balance between growth investment and enhanced shareholder returns,” said Mizuho CEO Masahiro Kihara at an investor presentation on Nov 15.

In the race to deploy their excess capital, the hottest area for all three banks has been India. The country’s strong economic growth is fueling demand for loans to fund capital expenditure across industries. Consumer demand is creating additional opportunities for lending and a record amount of money is set to be raised in initial public offerings this year.

MUFG has singled the country out as a specific pillar of its Asia growth strategy. It has aggressively courted India’s top conglomerates including Reliance Industries and the Adani Group. The bank has a goal of doubling its loan exposure in India to about $30 billion over the next several years. MUFG and its Japanese rivals plan to keep business ties with Adani Group despite founder Gautam Adani facing bribery charges in the US.

Japan’s largest bank took a strategic investment with a $333 million stake in DMI Finance Pvt Ltd. That deal valued the Indian shadow bank at $3 billion. MUFG has made clear though that it’s appetite is much larger.

“If there are good opportunities, we can spend big money,” said Yasushi Itagaki, head of MUFG’s global commercial banking business, adding multi-billion deals are possible. He was commenting on both India and the bank’s expansion into the Asian digital industry and declined to talk about specific deals.

India’s white-hot market for IPOs is also drawing in the Japanese. Mizuho and Nomura Holdings Inc. are the leading bidders to buy control of Avendus Capital Pvt., one of the country’s biggest investment banks. The two companies are jockeying to purchase a 63% stake from KKR & Co., which is seeking at least $400 million, according to people familiar with the situation.

Retail loans for India’s growing middle class are another area where Japanese lenders anticipate high demand over the next decade. The country experienced strong credit growth in the last few quarters as retail customers borrowed for everything from buying homes and vehicles to funding holidays and impulse purchases. SMFG, Japan’s second-largest lender, spent $700 million in March to take full control of the local company formerly known as Fullerton India Credit Co. after first buying a $2 billion stake in 2021. The unit specializes in housing and car loans. Like MUFG, SMFG has singled India out as a key focus because of its high growth potential.

“We will keep allocating necessary resources to capture its high economic growth,” said Yoshihiro Hyakutome, Sumitomo Mitsui’s co-head of global banking unit.

Mizuho is also chasing Indian retail consumers. In February, it announced a deal to buy 15% in Kisetsu Saison Finance（India）Pvt. Ltd., an Indian unit of a Japanese financial company Credit Saison for about $145 million. In corporate and investment banking, Mizuho has also held internal discussions about focusing on winning firms that invest in private businesses, according to people familiar with the talks.

Apart from India, MUFG has made it a priority to invest in fintech companies in other Asian countries. The move represents a major shift in MUFG’s growth strategy in the region, where the bank has spent billions to buy big commercial banks in Thailand and Indonesia.

This year, the bank announced investments of $195 million in Thailand’s Ascend Money Co. and $393 million in the Philippines’ Globe Fintech Innovations Inc., both digital payment companies.

“In the power dynamics of Asia’s unicorn industry, they can raise funds from anywhere,” said MUFG’s Itagaki. “So they are examining who is the best to team up with to boost their value.”

The US

The banks are following a different strategy in North America. There they are focusing on growth in corporate and investment banking, providing financing and advising companies and institutional clients. The playbook is the one pioneered by MUFG with its investment in Morgan Stanley in 2008, leaning hard on the experience and connections of a US partner.

Mizuho was the latest major bank to adopt this tactic with the completion of its purchase of the investment bank Greenhill & Co. for $550 million last December. It has been on a hiring spree since then, adding bankers for various sectors including financial institutions, health care and infrastructure.

“The Americas is the largest fee pool and Mizuho was historically underrepresented” in M&A advisory, said Jerry Rizzieri, CEO of Mizuho Securities USA. “Our objective is to be firmly entrenched as one of the top 10 corporate and investment banks in the Americas.”

In addition to fees, M&A advisory brings in other banking businesses, such as bridging loans, and underwriting bond issues as deal-making clients seek to finance acquisitions, according to Mizuho officials.

Mizuho has improved its position in some key areas this year, cracking the top ten rankings in several markets. In US corporate bonds, it jumped three spots to #7. In US loans, it rose four spots to #9 and it also ranked #8 in US investment grade corporate bonds, up a notch from the same period last year, according to data compiled by Bloomberg.

“Our product lineup allows us to access about 80% of CIB fee pool in the US,” said Hidekatsu Take, Mizuho’s deputy president and head of global corporate and investment banking.

At an earnings briefing in November, Mizuho CEO Kihara said the bank may consider further acquisitions after completing the post-merger integration of Greenhill. He also said investments in asset managers are possible, like what the bank did with private credit manager Golub Capital.

SMFG and Jefferies Financial Group Inc. are expanding their partnership and working together on corporate and investment banking deals. In the alliance, the Japanese bank brings its balance sheet and debt capital markets expertise while Jefferies adds M&A advisory and equity financing services. They have jointly worked on about 130 deals including M&A and debt and equity underwriting over the 12 months ending in September, compared with 30 deals as of September, 2023.

The two banks served as financial advisers to US property developer Alliance Residential Co. when it sold a minority stake to Japanese homebuilder Daiwa House Industry Co. Sumitomo Mitsui said the bank’s relationship with Daiwa and Jefferies’ ties with Alliance were utilized for the origination of the deal.

MUFG is expanding the areas of collaboration with Morgan Stanley in the US to the middle market, where the two companies aim to win more businesses in loans, M&A advisory and IPOs targeting smaller companies than they have been banking with so far. The company also recently hired a pair of senior bankers to expand the bank’s presence with mid-sized healthcare companies.

The Japanese banks’ overseas buildup has not been without setbacks. In 2021, MUFG agreed to sell its US regional lender Union Bank to U.S. Bancorp for $8 billion after it determined the unit lacked the scale to keep up with local competition amid growing IT and other necessary spending. The move sent shockwaves through the industry at the time, since Union Bank had long been considered a crown jewel of MUFG’s US operations.

The megabanks “have been doing overseas businesses for years but they haven’t quite done truly globalized management,” said Hideyasu Ban, a Bloomberg Intelligence analyst. “It’s still a challenge for them to secure good local talent and manage them effectively from Tokyo.”

–With assistance from Hideki Suzuki, Guillermo Molero, Alex Gabriel Simon and Reinie Booysen.

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