The Euromoney 25: MUFG

Euromoney, January 2018

Being a big Japanese bank is a fairly miserable state of affairs, but at least MUFG has a plan for what to do about it.

All Japanese banks believe they have to look overseas for revenue in light of negative interest rates and dormant activity at home, but MUFG is leading the effort. Two stockpiles for foreign acquisition came to light during 2017.

One is in the trust business, which is being revamped. It is transferring ¥12 trillion ($105 billion) of loans from 2,600 customers into MUFG’s broader lending unit, freeing capital for the trust bank to acquire overseas and transform itself into a leader in asset management and consulting.

It is thought to have ¥1 trillion to spend and the unit’s chief executive, Mikio Ikegaya, was pretty unequivocal in July: “We’re going to make acquisitions on a scale we never have before.” It wants ¥100 trillion under management by 2020, up from ¥60 trillion now.

The other stockpile is in the main bank, where unit chief Kanetsugu Mike said in October that the bank is seeking acquisitions in Asia and the US.

The big rumour is that it is taking on 40% of Danamon in Indonesia for about ¥200 billion. This would fit with other stake purchases in recent years – Security Bank in the Philippines, Bank of Ayudhya in Thailand, VietinBank in Vietnam (although it has also sold out of CIMB) – but the bank is tight-lipped for now.

Certainly Asian acquisitions will be cheaper than anything in the US, but MUFG appears to be serious about expanding there in mainstream lending, in specialist areas like aviation finance and clean energy asset financing, and in investment banking more broadly. It is the biggest shareholder in Morgan Stanley and owns Union Bank in California, but that does not even get it into the top 20 in deposits there.

“We need to be a little bigger from a competitive perspective,” said Mike in October.

Group chief executive Nobuyuki Hirano knows he has to do something. Despite a strong first-half number for 2017, the full-year return on equity has fallen from 9.05% in 2013 to 7.25% in 2016, and although it was an excellent 9.63% in the first half of 2017, this appears to have more to do with equity gains and profits from investments in affiliates than business fundamentals; net operating profits actually fell and earnings per share have been drifting down. Only the investment banking joint venture with Morgan Stanley and wealth management look good at home.

Hirano has spoken of removing 3,500 full time roles through attrition and less hiring, although by June the rumour was of 10,000, 7% of the workforce – but that sort of thing does not go down well in Japan.

What can be done? How does one sustain a business in a country with negative interest rates, a shrinking and ageing population, and credit demand that just will not grow? Income per full-time employee fell four years in a row up to 2017, according to Bloomberg.

Like everyone else, MUFG thinks the answer is digital, and tech was at the heart of the “re-imagining strategy” Hirano announced in May (which sounds an awful lot like DBS four years ago).

The idea is that financial technology will cut ¥120 billion of costs over the next few years.

“As structural problems such as the decline in lending margins and the shrinking and aging population emerge, we need to bring in new technologies, as seen with fintech,” Hirano said after the launch.

MUFG’s digital transformation strategy looks much like everyone else’s, with presentations full of clouds marked ‘disrupt’, a new job called chief digital transformation officer and promises about AI, data utilization and unconventional thinking. There is even a home-grown cryptocurrency, MUFG Coin.

It all sounds good, but transforming the culture and vision of an enterprise the size of MUFG, particularly in Japan, is an enormous challenge. At least the bank is aware of it.

Its digital transformation presentation identifies current workplace issues as “silo-based organizations”, “meticulously defined work processes” and “overtly strong risk aversion.” All too true.

MUFG is at least trying. It has ideas and a mighty target of an extra ¥300 billion in net operating profit within five years. Delivering on it is going to require technological reinvention, tough domestic restructuring and a great deal of success far from home.

Full article: https://www.euromoney.com/article/b163mx957j10qc/mufg-not-just-big-in-japan?copyrightInfo=true