Japanese banks appear in good shape and are making their presence felt overseas at a time when many are retreating. What is your secret?
We had our crisis back in 1989. Since then we have done our homework. We have rebuilt our capital base and our balance sheet is in quite good shape.
Now we are back to the market and are re-establishing ourselves, having totally changed our business model, and differentiating ourselves from our competitors.
Can Abenonomics truly work with China and other key global economies weakening?
The world is globalised and interconnected of course. So Japan cannot remain unaffected. While in the first quarter of this year GDP growth was 0.6% the second quarter was -1.7%. However, my personal observation is that Abenomics is bringing stability to the Japanese economy.
Abenomics of course consists of three elements — monetary easing, fiscal stimulus and structural reform.
Structural reform consists of many parts — including deregulation, pushing for smaller government, agricultural reform, the labour market and of course corporate governance.
This year the established corporate governance code has been updated. In the past years Japanese companies have had huge amounts of cash on hand and they placed deposits with Japanese banks even though the interest rate has been almost zero. But now they are under a great deal of pressure from the outside directors to use that cash for growth strategies or pay dividends to shareholders. As a result, a lot of Japanese banks and companies have done a lot of acquisitions, not only in Japan but also cross-border activities.
What has also helped is that the depreciation of the Japanese yen has encouraged a big increase in the number of tourists coming to Japan. Two years ago, the figure stood at just under 10m. Last year it was 13.4m. However, this year up until July the total was already 10m, meaning it is likely that we will see close to 19m tourists for the whole of this year. The government originally set a target of 20m tourists by 2020, the year of the Tokyo Olympics. So we are most likely to hit our target early, probably next year. In particular, we have seen a lot of Chinese tourists who have spent a lot of money. In total last year tourists spent ¥2tr.
This has had a very positive impact on the economy and been one of the key driving forces behind its improvement. Healthcare tourism, coming from China and other Asian countries, is also a factor.
You mentioned tourism as a positive factor. But the Japanese consumer is still scared to open his or her wallet.
The increase of the sales tax has been a factor. But countering that, the government has been putting pressure on companies to increase wages.
For example, Mizuho has last year increased wages for the first time in 19 years. Business performance is getting better, so a lot of companies such as ourselves have felt able to do this.
Also, for a lot of companies their headache is a shortage of workers. So to attract a bigger labour force they have to raise wages.
Through my conversations with top executives at Japanese companies I get the impression that Japanese consumption itself is coming back. This summer was extraordinarily hot and because of it I hear that they have spent a lot of money on things like air conditioning units and other consumables.
Do you think they are worried about the terrible fiscal situation?
Of course that is a big headache. But we are finally taking the right steps. In April 2017 the government plans to raise consumption tax from 8% to 10%. Last year they raised it from 5% to 8%.
Of course, even though they have raised the sales tax it is impossible for them to reduce the accumulated government deficits. However, we still have much to do to raise the sales tax. Look at Europe, where it is already much higher.
But the most crucial part of it is this: for the past 20 years Japan has been suffering from prolonged deflation. What Abe-san is trying to do is change the mindset of the people and grow the economy.
If you were Kuroda or Abe what would you do now?
I would accelerate reform, including deregulation.
Of course, Kuroda-san will eventually have to think about how to exit monetary easing, of which we have one year left. But for the moment, and given what the rest of the world is doing — with the exception of the US economy — i.e. monetary easing, he has little choice but to hold his course of quantitative easing.
We all agree that banks need to be better capitalised. But is there a middle ground that can allow banks to hold more inventory of securities, so as improve secondary market liquidity, which is dangerously shallow?
Global regulation of banks is getting tougher and tougher. It used to be the case that market makers had a lot of inventory on their books. Now we have to use our capital a lot more efficiently, which means we can no longer hold that inventory and therefore no longer absorb volatility. My observation is that banks have little choice. We have to recycle our inventory rather than hold big positions.
But both have to be well balanced. After the Lehman shock, the too big to fail issue had to end, of course. That means we have to have sufficient capital and quite strict restrictions — yes, we have to do that. But on the other hand, we have to think about procyclicality.
With Basel III we have had capital requirements, also the TLAC issue. Now regulators are trying to revise the standardised approach to risk-weighted assets, and also to do a standardised approach on capital floors.
No one knows what will be the interactions or coherence of these many rules and restrictions. They could create more procyclicalities that have a big impact on banking activities. Of course, all the new rules have not been completed yet — that is why we have been discussing with regulators what is appropriate. The regulatory framework has to be feasible and reasonable — it should not have a big impact on the real economy.
Our position as Japanese banks is quite stable. But European banks are trying to scale down their balance sheets and change their business models. Their investment banking businesses are getting less and less — each global bank’s proportion of investment banking is getting less and less because the capital requirements are too high.
Have the regulators been too severe?
The Lehman shock was severe and exposed a lot of what banks had done wrong. That kind of crisis should never have happened. So I would not say so. But fine tuning of the regulation is key. And we should not be too rushed in rolling out the new regulations.
Has there been an over-reaction to the fears of a slowing Chinese economy and its impact on Asia and the wider world?
We don’t really know what happened. I would say this though: the Chinese government is very smart and has done its homework on the Japanese crisis of 20 years ago. They have taken lessons from our mistakes, including a fast-appreciating yen that preceded the bursting of our asset bubble. Also, the government has the powers at its disposal to improve the situation.
However, my observation is that the economy is perhaps too big and too interconnected with the global economy for one government to manage very carefully.
Over the last year or so the stockmarket has increased by 2.5 times but based on very little fundamentals and not necessarily individual company performance. But everybody got on board, attracted by the rising prices. But suddenly everybody realised that there was little basis for such growth and demand dropped off dramatically, resulting in the sharp price falls and subsequent government support measures.
They have said that GDP growth will be 7% this year but we don’t know whether that it is true or not. So everybody is scared and wanting to know what is really going on in the underlying Chinese economy.
We held a seminar in Singapore for 50 or so of our global and local clients. Number one item on the agenda was China. Only the day before, the Chinese government had announced the depreciation of the renminbi. The level was too big and everybody was rattled.
President Xi Jinping has tried to implement structural reform, to try and turn China from an export-orientated economy to a more domestic consumption business model. However, domestic consumption has not picked up — we have reports from our clients in China of unsold inventories, for example — so once again they have to go back to the export-orientated model. That means they have had to devalue the renminbi to become more competitive. But the message shocked the market.
So given what is happening, what is Mizuho’s business plan in China?
It is a still a big market for us. We have 18 branches and more than 1,700 people working for us there. Last year was a record year for us there in terms of profits.
But I don’t think we can continuously keep on increasing our profit levels, because of the slowing activities and increasing costs. However, our business model is quite stable — most of our client base there is Japanese, also big multinational corporations and some of the big state-owned companies. But we will need to keep on managing it carefully.
Going back a step, to the general banking system in Japan. Japanese banks are back as the world’s biggest international lenders.
I dispute this, although I do not deny we are increasing our lending. For us, profitability is key. Of course, syndication league tables are important and increasing our balance sheet to attract more good clients is something that, yes, we do.
But our goal is how to maximise our profitability. This is where our so-called Super 30, Super 50 strategy comes in. Let me briefly touch on this strategy. We first selected 30 clients from four regions, so 30 each from ASEAN, East Asia, Europe and the Americas. We then increased it to the Super 50, but now the total number of global clients has increased to 250.
For Mizuho Bank, the customer-related business, the proportion between domestic and international in operating profit is most likely to be around 40%, perhaps 42% international. Last year it was 38%.
Out of that 42% more than two thirds come from non-Japanese clients, local clients. Out of that, almost 50% of the revenue comes from the Super 30 or Super 50 clients. They are blue chip companies with investment grade ratings, operating globally, and we are expanding our business with them by establishing long term relationships.
For us, lending is the entry ticket — but what we then do is cross-sell, from deposits to M&A activity, advisory, ECM, DCM and so on.
So lending is, yes, still important — we have a big balance sheet, thanks to our very sufficient capital base, and it is our competitive edge. But we recycle that balance sheet very efficiently. And our non-performing loan ratio is around 1% — quite sound and safe.
Didn’t the Bank of Japan express concern at the funding risk Japanese banks faced as a result of their sharp increase in international lending?
Despite the fact that we have done nothing to create an overseas retail deposit base, we are happy that there is no currency or maturity mis-match — we are very carefully managing the situation. For example, we are actively encouraging clients to increase their deposits with us, and are doing more long term funding.
The Asian crisis and Lehman shock taught us the lesson of carefully managing currency mis-matches.
But there have been suggestions that the Japanese premium is possibly returning.
The premium you refer to occurred during the Asia crisis when the Japanese premium was one percentage point. Now our funding cost is much cheaper than that of European banks. We have also issued long term bonds at very reasonable pricing — much better than European and US banks.
This international expansion that you have described, presumably it is a response to a lack of lending opportunities in Japan. But is it also a response to increasingly aggressive US banks looking overseas?
The past years have seen Japan suffering from a prolonged deflation. That has also meant that Japanese companies have kept their huge cash piles intact and not spent that money — thereby limiting our lending opportunities to them.
However, since last year that trend is reversing and we have seen domestic lending opportunities begin to increase. This is of course due to Abenomics, but also the corporate governance code has changed this year. Companies have to be judged by their shareholders about how they are utilising their money efficiently. So companies have started to spend their money for future growth.
To give an example, ecommerce business is increasingly active in Japan, so logistics businesses have started to borrow money to establish their transport systems.
Another example is the healthcare sector, where structural reform of the industry means many are either consolidating or expanding, meaning demand for lending is picking up as they require funding to pay for new equipment.
The domestic market is beginning to pick up. But the overseas market is a good place for us to expand. Even though in Japan Abenomics may be a success, we still face the ageing issue and other big issues such as a big fiscal deficit. This means we are not going to have rapid growth here — this year the government has a target of 1.5%. One and a half percent — that is not high growth. So growth strategies for many Japanese companies over the last year have meant going overseas — even though the yen has depreciated, making it more expensive for them to make cross-border acquisitions.
Of course, our business model is still Japanese clients, the local big clients such as BP, Volkwagen and IBM but also Japanese clients have made big acquisitions.
The post-merged clients, the integrated businesses, can also be our clients. Those companies have fresh demands for lending, and they have a high possibility to give us business opportunities.
So would you bank a company that doesn’t have a link with Japan?
Of course, our competitive edge is to be linked to the Japanese. But in order for us to be a global bank we should not just stick to Japan. We have to become globalised. This year we bought the US loan portfolio from Royal Bank of Scotland, and with it 100 people. This is not an acquisition of a bank — so we did not need to absorb huge amounts of goodwill. But it meant we could make money immediately.
In the US DCM league table, Mizuho’s position was number 16. RBS’s was 11th. Combined, we got into the top 10. Now our competitors include Deutsche Bank, Barclays and Wells Fargo — global banks. To compete with these banks Mizuho Bank has to be globalised — our management style and business model have to be globalised.
So after that purchase of RBS’s loan book, would you now bank a client that only does business in the US?
Well, our clients are global clients, so they do not just do business in the US market. They do business in the global market, including Asia and Japan. But I don’t just stick to Japan. I stick to Asia because what is our competitive edge? How do we differentiate ourselves from our competitors?
Of course, if you compete with Goldman Sachs or JP Morgan piece by piece or product by product you cannot be a winner. But our clients need global services and a global network, and our clients based in Asia see us as meaningful.
So we always try to think about what is our niche and our competitive edge. Yes, we can be productive and globalised but we always need to think about what is our base. And this is our Asia network and client base. In Japan we have our huge household retail network and huge asset base — ¥1,800tr.
So what do you call yourself — an Asian global bank or a global Asian bank or just a global bank?
Our target is to be an Asian global bank.
Where else are you growing in Asia?
Of course a lot of our Japanese clients have business in Asia and they try to be localised. This means they want Asia to be their market — rather than just using it as a venue where they can get cheap labour before exporting the goods to Europe or the US.
That means they need a local partner to provide banking services. So we offer those services to not just them but also their local partners. We have a branch network all over Asia now.
As I mentioned, we have 18 branches in China, but also five branches in India. In each of the ASEAN countries we have set up branches, at least in those countries where we have been allowed to. Recent branch openings include Myanmar.
What about European banks in Japan and the rest of Asia? We have seen some high profile retreats. Are they gone forever?
I think so. They have done their homework after the European financial crisis and their capital positions are improving. However, they are very cautious about expanding their businesses, especially in the Asian market. Their home ground is Europe and, for some, also the US. But in Asia they realise they are less competitive.
This creates a great opportunity for us to do business with European corporates.
What about your plans for Europe?
We have a good chance in Europe. We have a good rating and our balance sheet is in good shape. We can do the cross-border financings for M&A deals, like the bridge financing we were involved in, along with BNP Paribas, for Bayer backing its acquisition of the consumer care business of Merck & Co last year.
It’s important to point out that this was bridge financing and was taken out by permanent financing that was syndicated down to the market. So a good example of us using and then recycling our balance sheet.
Do you not need to buy a deposit-based institution in the US or Europe to keep on expanding your business there?
Of course we try to capture deposits from our client base all over the world. But for a strong retail business you need scale, and scale means you need to spend a lot of money. And because of global regulations we cannot utilise deposits in foreign countries for our funding. Basel III makes it hard to know whether this kind of acquisition makes sense or not.
Having said that, we are still looking for inorganic opportunities in overseas markets. For example, five years ago we made an equity investment into Vietcombank in Vietnam, a state-owned commercial bank.
So having bought RBS’s loan book in the US, you’re not going to go one step further and buy the UK government’s stake?
[Laughs heartily]. I don’t think so. Would you recommend we do?
Well, it’s not for me to say, but as a general rule governments should not be running banks. What about emerging markets outside Asia?
We have one office in South Africa, while in Latin America we have an office in Santiago and we have bought a local bank in Brazil. We also plan to set up a banking subsidiary in Mexico. They are exciting and interesting markets but we must always think about what our competitive edge is.
Project finance is an important business for us in the emerging markets. But only if the project sponsor is our client and if we can do some of the cross-sell business — we aim to utilise our lending. Cross-sell is the key.