View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. News
May 29, 2009updated 04 Apr 2017 1:13pm

Making sense of Japan

Latest full-year results from Japans leading banks make for dismal reading, but some players are still confident they can crack the countrys notoriously tricky retail banking market Headline figures for financial 2008 illustrate the extent to which the Japanese economy has suffered at the hands of the credit crisis, particularly at the countrys three megabanks, where sustained losses on securities pushed institutions deep into the red

By Dan Jones

Latest full-year results from Japan’s leading banks make for dismal reading, but some players are still confident they can crack the country’s notoriously tricky retail banking market. Dan Jones reports

Headline figures for financial 2008 illustrate the extent to which the Japanese economy has suffered at the hands of the credit crisis, particularly at the country’s three megabanks, where sustained losses on securities pushed institutions deep into the red.

Mitsubishi UFJ (MUFG), Japan’s largest bank by assets, reported a net loss of $2.7 billion, while Mizuho and Sumitomo Mitsui lost $6.1 billion and $3.9 billion respectively.

All three, however, have forecast a return to profit in fiscal 2009. MUFG has predicted net income of $3.1 billion for the year to March 2010; Sumitomo Mitsui net income of $2.3 billion and Mizuho net income of $2.1 billion.

But both Sumitomo Mitsui and Mizuho cited an expected reduction in loan loss provisions as reason for their optimism, a theory which looks doubtful given the continued deterioration of the Japanese economy, which contracted by a record 4 percent in the first three months of 2009.

As it stands, provisions have continued to climb sharply: total credit costs at Sumitomo Mitsui’s banking division, for example, rose to $5.79 billion from $1.5 billion a year previous in the 12 months to 31 March 2009.

The megabanks have already moved to counter such losses, with a fresh round of capital raising on the cards for both Mizuho and Sumitomo Mitsui.

The two institutions are each planning to raise up to $8 billion in capital, while MUFG, which announced plans to raise a similar amount at the end of 2008, has now cancelled its planned $262 million purchase of Citigroup’s NikkoCiti Trust and Banking unit.

Swinging from profit to loss

The story is a similar one at the majority of the financial institutions featured in RBI’s analysis of Japanese full-year figures, with banks and consumer finance firms alike typically swinging from healthy profits to sizeable losses – indicating the extent to which the credit crisis has flattened the green shoots of recovery that were beginning to be seen in an industry previously crippled by the country’s ‘lost decade’.

Retail divisions largely tracked the growth rates witnessed at their parent groups, with loan provisions and heavy losses on retail investments proving particularly ruinous. But there remained isolated units which bucked the trend, including those at Shinsei and Aozora, two institutions both controlled by US private equity firms.

Speculation remains that the pair are engaged in merger talks, but while both banks reported full-year losses at group level, retail results were more encouraging.

At Aozora, full-year retail net income rose to $18 million from a small loss the year previous, while Shinsei converted a $67 million loss into a $22 million profit over the same period.

Sanjeev Gupta, head of the individual group at Shinsei, told RBI that a reassessment of retail strategy that took place at the beginning of fiscal year 2008 was behind the division’s change in fortunes.

“It was imperative to completely revamp the business, from both a revenue perspective and a cost perspective,” he said.

“We had too many divisions as support functions – there were two divisions in distribution, one for internet and one for branches – there was no reason for this so we combined the channels.

“Similarly, we had loan products separate from deposit products for example so we combined those as well.”

The most notable improvement came in retail deposits, which rose from $40.7 billion to $53.6 billion year-on-year, an increase of some 26 percent.

“We brought out a one-year deposit product that gives 1 percent annual interest to customers. That was accepted very well in the market and helped us improve our revenue substantially. It also helped fund the treasury and consumer finance businesses – the entire GE Consumer Finance [now Shinsei Financial] purchase was funded by retail deposits, for example,” said Gupta.

Japan Post Bank remains the largest bank in Japan, and indeed the world, by deposits, though it has not released 2009 figures. The institution’s stated target of offering a full-scale retail bank to consumers remains a long way-off, however.

“Post Bank is not progressing very well, and is yet to familiarise itself with the retail banking culture,” said Ismael Pili, co-head of regional banking research at Macquarie Group in Tokyo.

That lack of familiarity with retail banking is not limited to new market entrants, however. The megabanks, who are far ahead of most competitors in terms of distribution reach and retail customer bases, are similarly hampered by the lack of a retail-oriented approach, according to Pili.

“For the most part it’s akin to trying to steer a battleship – the number of retail loans you’d have to make to replace just one big corporate loan is tremendous. MUFG is the megabank with the largest retail exposure, but the cycle is coming back to bite them now due to concerns over their home loan portfolio. The selling culture is extremely weak; if I had to estimate a cross-sell ratio I’d say it would be close to 1.0 product per customer,” Pili said.

“The slow transition from savings to investment has stopped. We are still struggling in retail,” an MUFG spokesperson admitted to RBI.

Japanese full-year results

Japanese consumer finance firms ranked by group assets, FY 2008

 

Group profit ($m)

Consumer loans ($bn)

Group assets ($bn)

Staffed branches

Customer accounts (m)

FY08

FY07

FY08

FY07

FY08

FY07

FY08

FY07

FY08

Promise

-1,293

165

15.92

18.07

18.12

20.87

358

363

3

ACOM

141.3

366.1

11.76

13.21

16.59

19.24

118

137

2.1

Aiful

43.9

283.3

12.04

16.89

12.83

15.87

133

223

2.6

Takefuji

-2,650

146

8.91

12.36

10.1

14.58

210

471

1.48

Source: RBI

Retail-orientated approach wins

While the megabanks are suffering, Pili believes that the Japanese institutions with the most retail-oriented approach are trust banks, though the largest such institution, Sumitomo Trust & Banking, saw its net profit fall by 90 percent from $865 million to $84 million in the year to 31 March 2009.

The group’s retail financial services division fared little better, with profit before credit costs falling from $319 million to $238 million on the back of weaker sales of individual annuities and mutual funds.

It is mutual funds, however, together with dual-currency deposits and other products, that Shinsei believes will continue to aid retail earnings in future years after a relatively strong performance in 2008.

Gupta insisted that the post-Lehman dip in interest in such products represented another opportunity for growth within the bank’s retail division, and not necessarily via traditional channels.

“We are finding customers are coming to branches very well prepared with their own information and questions, and we are looking at how our channels can support the customer buying process,” said Sandeep Deobhakta, chief operating officer at Shinsei’s Retail Banking Sub-Group.

“Among banks, we have been one of the biggest sellers of mutual funds via the online channel.

“We present tools on the web that make it easier for customers to look at and buy a fund online. But at every stage of that process they are also given the option to set up a face-to-face consultation.”

One way in which Shinsei is supporting consumers’ more deliberative purchasing strategies is to launch a number of “consulting spot” branches in Japan; smaller versions of the bank’s 32 financial centres that focus on consulting and discussing with customers.

“Branches and financial centres typically have a lot of transaction components. We try and minimise that by encouraging customers to make these transactions through other channels and to take that part of the branch traffic out of the equation,” said Deobhakta.

The consulting spots will represent the focal point of Shinsei’s physical expansion for the foreseeable future; other players, however, are in the middle of a significant contraction in branch numbers.

Japan’s consumer finance companies, already hampered by a cap on interest rates which has led borrowers to claim interest charge refunds from lenders, now face sharp rises in loan losses.

These factors are spurring on a severe and continued retrenchment: at Takefuji, for instance, which reported an annual loss of $2.65 billion, total branch numbers have fallen from 1,729 as of March 2007 to 1,051 this year, with manned branches falling from 471 to 210 over the same period (see table).

Promise, meanwhile, saw total branch numbers fall from 2,124 to 1,606 in the 12 months to 31st March 2009. According to Promise, the total number of registered moneylenders in Japan fell from 9,115 companies to 6,178 companies over the course of the financial year.

Fellow consumer finance firm ACOM has now become a fully consolidated subsidiary of MUFG, but analysts suggest that closer co-operation may come at a price for the megabank.

“We are still in the middle of this huge issue of lenders having to pay back excess interest. This is not going to help banks grow their consumer businesses,” said Kristine Li at KBC Securities.

Li is also less than hopeful for the state of the mortgage market, advising that the growth in mortgage loans “is coming to an end” and pointing out that the megabanks are no longer able to benefit from the transferral of loans from government-owned housing corporations to their own balance sheets.

Smaller banks are also reassessing their priorities, with a spate of consolidation likely to be a key theme in 2009 and beyond.

Two such institutions, the Bank of Ikeda and the Senshu Bank, have already announced their intentions to merge. For others, however, their relative stature simply increases the prospect of boosting market share in future.

“Japan has ¥740 trillion ($7.68 trillion) in total deposits, so the sky is the limit. We are at ¥5 trillion in deposits so we have only scratched the surface,” said Gupta.

Japanese full-year results

Selected Japanese banks ranked by group assets, FY 2008

Bank

Group profit after tax ($m)

Retail profit ($m)

Retail loans ($bn)

Retail deposits ($bn)

Group assets ($bn)

Branches

 

FY08

FY07

FY08

FY07

FY08

FY07

FY08

FY07

FY08

FY07

 

MUFG(1)

-2,700

6,580

3,370

4000

188.5

189.6

648.7

645.6

2,052.2

1,992.9

600

Mizuho

-6,100

3,220

-3,033

2,020

124.1

122

359

350

1,577.1

1,594.5

422(2)

Sumitomo Mitsui(1)

-3,920

4,760

N/D

1,749

155.1

150.7

360.3

351

1,235.4

1,156.1

425(2)

Norinchukin Bank(3)

-5,720

2,770

N/M

N/M

N/M

N/M

N/M

N/M

646.5

630.9

33

Resona(1)

1,280

3,130

1,137

1410

124.6

123.4

219.4

215.5

411.7

412.2

589

Sumitomo Trust & Banking(1)

8.25

860

233.58

313.2

20.22

19.91

89.3

85.9

220.3

229.1

63

Shinsei

-1,480

627.8

21.7

-66.1

10

9.38

51.6

40.7

123.4

119

37

Aozora

-2,500

61

18.6

0

2.84

2.97

19.7

15.4

62.8

75

20

N/D = not disclosed. N/M = not material. Retail figures refer to units either wholly or primarily focused on retail segments and may be an estimate figure derived by RBI. (1) Retail figure is before provisions and tax; (2) Figures do not include corporate outlets; (3) no retail. Source: RBI

 

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A weekly roundup of the latest news and analysis, sent every Wednesday. The industry's most comprehensive news and information delivered every month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU

Thank you for subscribing to Retail Banker International