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February 13, 2012 3:55 pm
Sumitomo Mitsui Financial Group is aggressively expanding its presence outside Japan, taking advantage of a strong yen as it moves to increase overseas assets by about $78bn over the next two years to offset weak domestic loan demand.
Japan’s second-largest bank by market capitalisation invested in two foreign institutions in quick succession this year: RBS Aviation Capital, which it is acquiring for $7.3bn, and Moelis, the boutique US financial adviser, in which it has taken a roughly 5 per cent stake for $93m.
The bank, which had overseas assets of $127bn at the end of last year, says it has already looked at about Y8tn ($103bn) in assets up for sale by western banks, which are under pressure from new capital adequacy requirements to shrink their balance sheets.
SMFG’s global push comes as weak demand for loans at home and a strong yen are encouraging many Japanese financial institutions to look overseas for growth in what could become a second wave of such investment, following a string of acquisitions in the 1980s.
Mitsubishi UFJ Financial Group, which bought £4bn of project finance assets from Royal Bank of Scotland last year, and Mizuho are also looking to ramp up their overseas presence.
However, SMFG has been the most explicit about its ambitions abroad, with a plan to increase overseas assets by nearly 60 per cent and raise the percentage of overseas banking profits from 26.8 per cent at the end of last year to 30 per cent by the end of March 2014.
“We can’t grow if we just stay in Japan,” says Yoshihiro Hyakutome, general manager of the global business strategy department of Sumitomo Mitsui Banking Corporation, the bank at the core of SMFG.
The globalisation drive is reminiscent of the 1980s, when Japanese banks competed with each other to open branches in New York and London. During that spree, Fuji Bank acquired Heller, a commercial finance group; Industrial Bank of Japan took control of IBJ Schroder Bank and Trust; and Dai-Ichi Kangyo Bank took a 60 per cent stake in CIT, a small business lender, all in the US.
The bursting of Japan’s asset bubble in the 1990s forced them and many other Japanese banks to sell their stakes and retreat to their home market.
SMFG officials stress that their current expansion strategy is fundamentally different from the past because of strict new regulations, such as the Basel III capital adequacy rules, and internal investment criteria.
Hironori Nozaki, banking analyst at Citigroup in Tokyo, says executives at Japanese banks remember the mistakes of their predecessors, so “rather than buy just anything, they are being quite selective”.
“We have become prudent,” says Hideo Kawafune, head of SMFG’s strategic planning group.
The Japanese bank’s small stake in Moelis follows an alliance it formed with the boutique investment bank last March and is aimed at providing access to global M&A information.
“We won’t touch assets that don’t fit our strategy, even if they are cheap,” says Mr Hyakutome.
Nevertheless, investors are concerned that Japanese banks are repeating past mistakes by paying too much.
One of SMFG’s goals is a consolidated net profit return on risk assets of about 0.8 per cent. “That’s an aggressive target in this market,” says Brian Waterhouse, banking analyst at CLSA in Tokyo, and is “probably impossible to achieve without substantial expansion overseas”.
SMFG’s deal values RBS Aviation at 1.2 to 1.3 times book value, which is higher than the 0.8 times book at which comparable US aircraft leasing companies are trading, says one analyst.
“There are people who say that the premium [SMFG] paid is high and that in the current environment, they could have bought at a discount,” says Mr Nozaki.
But for SMFG, RBS Aviation’s pre-tax return on assets of 3 per cent is very attractive considering ROA is about 1 per cent at best for commercial lenders in Japan.
SMFG is looking at assets in areas with which it is familiar, such as project finance, collateralised loans and trade finance, says Mr Hyakutome, rather than unfamiliar businesses with a high-risk, high-return model such as a foreign investment bank or hedge fund.
It was comfortable with RBS Aviation Capital because it is a relatively low-risk business with steady returns. Crucially, SMFG is also retaining current company management rather than parachuting in Japanese executives – another mistake acquiring banks made in the past.
Because it is avoiding overly risky businesses, SMFG officials point out that its overseas foray is fundamentally different from that of domestic rival Nomura, which has struggled to generate profits from its overseas operations after acquiring the European and Asian operations of Lehman Brothers.
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