Loans have always been the mainstay of Japanese banking activity and continue to be. But in the context of their domestic troubles, these banks have transformed themselves structurally and strategically into very different types of lenders. Where once it was not a question of whether Japanese banks would join a deal but how many, now they are far more disciplined and selective in using their balance sheets. Philip Carter reports.
There are many critics of the Japanese banks in the European syndicated loans market. Call up a few syndicators from non-Japanese banks and they will reel off the old clichés about them. "Ha! What's there to say? They hardly do anything." "They are incredibly slow." "They have a herd-like mentality." "They ask ridiculous amounts of detailed and unnecessary questions." "They are frustrating to work with." "They are forever entering and exiting the market."
The complaints go on and on. Few bankers from leading syndications houses have anything particularly positive to say about the remaining Japanese lenders in the European loans market.
No doubt there are grains of truth in some of these statements. But also they reveal that historical stereotypes linger in the loans market well past their reality date.
Perhaps the Japanese banks are themselves to blame. They have traditionally been slow at promoting themselves - a legacy, perhaps, of their cultural roots.
But if the Japanese banks have not defended themselves from their critics volubly enough it is understandable. They have been preoccupied with pushing through a spate of mergers, which has transformed their entire business (though critics would say not nearly enough). And perhaps only now are these newly created banks beginning to gel together into cohesive new entities with their own identities as opposed to being merely amalgamations of their legacy institutions.
In 1997, there were seven Japanese lenders in the top 50 European arrangers league table. Today there are just three - Bank of Tokyo-Mitsubishi, SMBC and Mizuho, all the products of mergers. The only other Japanese bank with any sort of presence in the European loans market is UFJ, itself a product of the merger of Sanwa Bank and Tokai Bank.
These mergers have created some of the biggest financial institutions in the world. And one criticism that can be fairly levelled at the Japanese banks still active in the loan market is that they punch well below their weight. Given the fact that they possess some of the world's largest balance sheets - Mizuho is the biggest bank in the world in terms of assets - their standing in the league tables is telling. "Their positions in the league tables are definitely out of synch with their size," notes one European banker.
The path to the creation of these banks and their changing place in the European syndicated loan market is not itself unprecedented. The banking sector worldwide has been undergoing a period of consolidation for some years now. "Clearly the number of Japanese banks active in the market has dropped through mergers and through some banks withdrawing from international markets," says Chris Scott, head of loans at SMBC in London.
"But this is more or less the same as what happened in the 1980s with US banks, which pulled back following credit problems."
The mergers that stripped the loan market of many longstanding Japanese lenders were on the whole marriages of necessity. The problems that forced many of these banks together are well documented. They are also deep rooted. While the mergers may have made compelling strategic and business sense, the underlying problems, chiefly relating to the banks' Japanese operations in the form of weak capital bases and large amounts of non-performing loans, will not be dealt with so quickly.
But despite the overall weakness of many Japanese banks, the loans side of their business in Europe is probably better positioned than it has been for some time.
The first of the mergers, and perhaps the only one to be originated from a position of relative strength, was the deal that created Bank of Tokyo-Mitsubishi.
Bank of Tokyo was historically an international Japanese bank specialising in foreign exchange type business. Mitsubishi Bank had a strong domestic franchise as part of the Mitsubishi group.
"Our merger was motivated not by weakness but by the desire to combine two good businesses into one stronger bank," says Francesco Carobbi, head of loans at BTM in London.
BTM also enjoys the distinction of being the only Japanese bank not to have received government support for bad loans under a preference share scheme put in place in the late 1990s. "You don't get government support without some strings being attached and Bank of Tokyo-Mitsubishi has managed to steer away from that," says one banker.
For the other Japanese bank mergers, however, at least one party to the deals was in a weak position. This played a key role in defining their banking strategies and their treatment of loans. As Kim Humphreys, head of loans at Mizuho in London, says: "The assessment of the value of a bank's client base is key to the business today."
Profitability of loans is paramount. "There is much less enthusiasm to provide assets unless the remuneration on various measures such as Raroc is acceptable," says Humphreys. "As a result of our merger we had a large number of corporate client relationships among the three banks. We had to look hard at all of these and identify which of these are on a global basis or have the potential to develop that way."
Moreover, outside the yen market, these Japanese banks do not have the product range or skills to offer full service banking - the loans they make must be self-supporting. This helps to define their entire banking approach. All the banks now profess to tackling their lending business with stricter discipline and claim they are no longer willing to take unprofitable assets for the sake of a client relationship that does not deliver an overall economic return to the bank.
"The loan product is one of, if not the most important products for us," says Carobbi at BTM. "We are very much an asset and loan-based business and have followed the same path as most other banks active in the international loans market. There are only a very few banks that are able to offer a global set of products where cheap loans can be supported through the cross-selling of other banking business.
"Our syndications team is organised as a profit centre and if we are not down to our target final hold levels on a deal the syndication group shall bear the cost for achieving the sell-down target."
Planning for the future
Having shed those clients no longer deemed valuable enough, the banks are aggressively pursuing business with their chosen clients.
Part of the orientation of their new strategies is also derived from the historical franchise and skills of their legacy institutions. The Japanese banks now combine sectoral and geographical specialisation.
"At Sumitomo and now SMBC, we have always sought to arrange loans, not just participate," says Chris Scott at SMBC. "Sumitomo, for example, was pioneering in the Czech Republic and other countries in central Europe. We continue to have a strong focus on that region."
Project finance has been a traditionally strong market for Japanese banks and this continues to be the case. BTM identifies a number of sectors where it is is strong, including power, oil and gas, telecoms and aircraft. The bank also has a good record in the Scandinavian region with clients such as UPM Kymmene. SMBC remains a strong player in the Middle Eastern project finance market as well as in South Africa.
At UFJ, the least visible of the four Japanese banks in the market, the bank has a specific specialism that distinguishes it from its peers. "Our main business profile in the Euromarket from the viewpoint of being an arranger is heavily focused on structured trade and structured commodity finance," says Graham Franklin, head of syndications at UFJ Bank in London.
The lack of league table visibility is by no means an issue for UFJ. "Our main driver is return, not profile," says Franklin. "The position in league tables is not a real consideration for us, but as with most banks today yield is."
The bank is at its most visible in the Turkish loan market, where all the Japanese lending houses have a strong track record.
Mizuho, which draws on the strengths of the former Fuji, IBJ and Dai-Ichi Kangyo banks in terms of project finance expertise, also remains committed to the project finance market.
The bank is also the only Japanese lender to perform well in the leveraged finance market. This is chiefly a legacy of Fuji Bank and the strong sponsor relationships it developed. "Fuji Bank brought to Mizuho strength in the LBO market," says Humphreys. "The bank had a focus on sponsor relationships which we have continued to follow and support."
For Mizuho, the bank has opted to track clients working from its Asian base and Europe. "The bank is looking to develop relationships with key international clients, particularly those with business potential in Asia where we can play to our strengths as a major player there," says Humphreys. "We are in the position to enhance relationships with European corporates working in Asia and also Asian corporates looking to develop business in Europe."
At SMBC a similar focus on following clients prevails. "Our strategy is to pursue our clients and that includes selected major European corporates," says Scott at SMBC. "SMBC benefits from the very strong corporate relationships that Sakura and Sumitomo brought with them."
The secondary loan market has played an important role for Japanese banks as they have sought to rationalise their relationships and engineer coherent portfolios following their mergers. But they have each taken a slightly different approach to its use.
Comments from other banks about the behaviour in the secondary market of at least one of the Japanese houses over recent months underlie the inconsistent approach that characterises Japanese banks in the loans market more generally.
"There seem to be some curious trading patterns among them," says one loan banker. "Around two months ago one of them was a massive seller in the secondary market. That same bank is now looking for assets to buy. As the sale was a portfolio sale, you would guess that with the cost of organising that sale, the overall economics cannot be very attractive."
Mizuho and SMBC use the secondary market for trading opportunities as well as for portfolio management. Bank of Tokyo-Mitsubishi, however, steers clear of trading directly. "Bank of Tokyo-Mitsubishi does not trade loan assets but we see the secondary market as a tool for managing our portfolio with an eye on our relationships," says Carobbi. "We use the secondary loan markets to rebalance our portfolio and better manage our balance sheet."
UFJ approaches the secondary market occasionally. "For us the secondary market is certainly of interest although I would not say we are big users of it," says Franklin at UFJ. "But we do buy and sell assets when the right opportunity presents itself. Sometimes this is driven by the fact that tickets in primary are too large for our appetite, but we can buy a smaller amount in secondary. Also if we need to manage our exposure to a particular asset we would normally do this through the secondary market."
Debunking the myths
So, after some radical transformations in their structures and approaches to the market, do the long standing criticisms of these banks remain valid?
A glance at a recent global bookrunners league table gives the lie to claims that they hardly do anything: Mizuho is ranked eighth, running the books on 78 transactions; SMBC stands in 12th place with 137 transactions; and Bank of Tokyo-Mitsubishi ranks 17th with 83.
But how about perhaps the most frequent criticism of all, that they are frustrating and nit-picking to work with? "Their approach tends to be that in preparing for a credit approval, they feel obliged to find the answer to every conceivable question that might come back to them for the credit committee," says one banker. "This makes it a frustrating process and you know that 95% of the questions we have supplied answers for have not been needed."
For one thing, say the Japanese banks, having to refer to their firm's head office for approval is hardly unique. Nor does this take undue time. "It is a myth that the Japanese are any slower, it all depends on the situation," says Scott at SMBC. "Nor is it different for any other banks in London who have to get clearance from their respective head offices for big deals."
Certainly, following their mergers these banks seem to enjoy a greater degree of autonomy in terms of commitment decisions and, to a lesser extent, underwritings than before. "Before, many credit applications were sent to Tokyo for approval," says Carobbi at BTM. "But now most are done from London. We have sizeable limits here."
And what of the oft-claimed herd-like mentality that supposedly governs Japanese market behaviour? "You do get the feeling that they all talk to each other at the head office level," says a banker from a European house. "You get these situations where after we have had no response from any of them, within an hour of one getting back to us they all have."
Perhaps before the mergers this was the case on the landmark transactions, but, if so, it was no different to any other group of banks discussing a major deal behind the scenes.
"While there is a relevance to what your peer group is doing, we would not do a transaction simply because the other Japanese banks were doing it," says Franklin at UFJ. "I have the feeling that this is also the case for the others. Now there is much more individual selectivity among banks. I am not convinced that everybody huddled together to decide on a deal beforehand anyway. But if it was the case, it certainly is not now."
Even the supposed market dominance of Japanese lenders is more myth than fact. "I doubt that the Japanese ever dominated the market as much as people give them credit for," says Kim Humphreys at Mizuho. "But collectively they did provide a lot of liquidity - and they still do."