The Lex Newsletter: Tokyo comes to Wall Street (again)

Dear reader,

Mizuho Financial Group is hardly the first foreign visitor to run a little wild in New York City. Back home in Japan, Mizuho is a relatively conservative lender. But its US arm recently provided financing for a $16bn leveraged buyout of TV ratings business Nielsen Holdings.

The US is once again the promised land for some of Japan’s largest financial institutions. Mizuho, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group are among the pilgrims. They have been beefing up their US presence in everything from M&A advisory to capital market underwriting and syndicated lending.

With no end in sight for the Bank of Japan’s ultra-low interest rate policy, Japan’s megabanks have to look overseas for growth. Mizuho earlier this month agreed to buy US boutique investment bank Greenhill & Co for $550mn. SMFG struck a deal in April to more than triple its stake in Jefferies, another investment bank, to 15 per cent. MUFG, Japan’s biggest bank, has a more than 20 per cent stake in Morgan Stanley.

Other foreign banks have sought footholds in the US in recent years through retail banking, albeit with mixed success. They have struggled to compete with big Main Street lenders such as JPMorgan Chase, Bank of America and Wells Fargo.

Over the past two years, BBVA of Spain sold its US retail business to PNC. HSBC offloaded its US branches to Citizens Bank. France’s BNP Paribas disposed of its US unit Bank of the West to Bank of Montreal (BMO).

Japanese banks, by focusing on dealmaking and getting a slice of the fee pool, are hoping to have better luck.

Foreign investment banking looks more lucrative than retail lending in Japan. Mizuho’s global corporate unit boasted an 8 per cent return on equity last year and generated ¥222bn ($1.6bn) in net income. That compares with the ¥33bn pulled in by its retail and commercial banking business in Japan, which had a return on equity of 1.7 per cent.

Mizuho is the 15th largest bank in the world with about $2tn of assets. It beefed up its debt underwriting business in the US following its 2015 acquisition of Royal Bank of Scotland’s North American corporate loan portfolio. Although it does not rank among the top 10 for global M&A, it is a top 10 bookrunner for US equity offerings this year, according to Dealogic.

Mizuho ranks 12th for US debt offerings and is the number seven bookrunner by loan volume. Mizuho’s big shortcoming is its weakness in M&A advice. It is hoping to fill that with Greenhill.

Mizuho is paying a significant premium for an M&A boutique that has seen better days. Its offer of $15 a share for Greenhill is more than double the stock’s closing price before the announcement. Yet the firm’s revenue and net income are lower today than in 2016.

M&A is fundamentally a people’s business. Culture clashes aside, to keep staff from defecting after the acquisition Mizuho will have to stump up for generous retention packages. This means high fixed costs at a time when both the M&A and initial public offering markets are in the doldrums. There is no shortage of competition in the advisory space. But redundancies at bulge bracket banks should help Mizuho recruit and retain talent.

Foreign buyers do best on Wall Street when they are tolerant of local culture. Barclays insiders joke that executives within its New York operation never noticed they were no longer working for Lehman Brothers after the UK bank bought the operation in 2008.

In western financial centres, Japanese banks have a bad reputation for long reporting lines and slow capital allocation.

By sheer coincidence, this brings us on to Nomura. Once the world’s biggest brokerage and a symbol of Japanese corporate empire-building, the Japanese group has been trying since the 1980s to break into the top league of global investment banks by expanding in the US. Most recently, it took a $2.9bn hit from the implosion of US hedge fund Archegos Capital in 2021.

Japanese banks’ push into lending is an obvious source of risk. Mizuho’s loan book for the Americas grew nearly a quarter year on year to $108bn at the end of 2022. Its lending back home was little changed at about ¥54.7tn.

But Japanese banks have strong balance sheets and are flush with cash. Their shares trade at sharp discounts to their book value. Mizuho and SMFG are both on 0.6 times while MUFG is on 0.7 times. A successful US expansion could help change that in the medium term.

Enjoy the rest of your week.

Pan Kwan Yuk
Lex writer