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.

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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.

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.

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