Mitsubishi UFJ, Japan’s largest bank, gave investors an
update on its future plans after reporting a 49 percent drop in its
first-half profits. In terms of retail banking, the bank has
targeted improved sales of insurance and investment products as
well as better online distribution. William Cain
reports.
Nobuo Kuroyanagi, CEO of Japan’s Mitsubishi UFJ Financial Group
(MUFG), says deregulation of the Japanese insurance industry and a
widespread consumer shift from traditional savings towards
equity-based investments are the bank’s best prospects for growth
in 2008 and beyond.
Go deeper with GlobalData
Speaking at the end of November, Kuroyanagi announced the bank –
Japan’s largest financial group, with ¥187.3 trillion ($1.65
trillion) in assets – would bring in staff from insurance companies
to supplement sales teams in its 789 Bank of Tokyo-Mitsubishi
UFJ-branded retail branches.
New products and services will be launched – including life,
medical and cancer insurance – to meet demand from the increasing
number of people hitting retirement age.
He stressed that MUFG will also look to capitalise on growing
demand for investment products.
In mid-November, the group increased its stake in online broker
kabu.com from 40.78 percent to over 50 percent – the bank said the
deal reflected changing distribution habits of Japanese consumers
towards online channels as well as a general demand for
higher-return investment products.
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By GlobalDataBut Ryoji Yoshizawa, MUFG analyst at ratings agency Standard &
Poor’s (S&P), told RBI that MUFG’s plans were unlikely
to have any significant impact on the company’s future market share
or earnings in the overcrowded Japanese retail banking
market.
Although deregulation of the Japanese insurance industry would help
revenues for the bank, he said more stringent laws on investment
products would cancel them out.
Yoshizawa said: “Overall, the impact is probably neutral. They will
benefit slightly from the relaxing of insurance laws. But if we
talk about sales of investment trusts, it will probably be a
negative impact because of the new laws.”
He said the growth in sales of investment products slowed in the
first half of 2007. First-half fee income from pension trusts,
investments trusts and money trusts fell by ¥1.3 billion compared
with 2006 because of the introduction of accrual accounting
treatment for trust fees.
But fees did increase ¥700 million in other business categories,
driven by investment advice fees.
The shift from savings to investments
In the presentation in Tokyo to analysts, Kuroyanagi was optimistic
about the prospects of making further headway in selling
investments. He said: “In retail banking, the most important area
is how to tie the shift from savings to investments to higher
profits… To date, we have been steadily increasing our overall
customer assets, and particularly our individual deposit balance of
more than ¥60 trillion. In the future we aim to increase earnings
by strengthening personnel, products, services and branches.”
The bank says it has already taken a step towards improving
revenue. Sales of investment funds and personal annuity insurance
increased ¥600 million in the first six months of fiscal year 2007
compared with the same period last year, which the bank said was
mainly because of higher investment trust sales commissions.
Kuroyanagi said: “We are aiming to raise profits through the sales
of insurance products, but insurance is an area that requires a lot
of specialist knowledge, and it takes a long time to train
employees from scratch.
“Consequently, we decided to introduce professional insurance staff
from insurance companies… We are aiming to solidify our business
base in the fiscal second half, and are aiming for profit growth
from the following fiscal year onward.”
A focus on retail banking
Since MUFG was formed in a merger between what were then the
country’s largest and fourth-largest banks – Mitsubishi Tokyo
Financial Group and UFJ Holdings – in January 2006, it has said it
would focus on developing its retail banking business.
Immediately after it merged, MUFG set out a plan to make 35 percent
of group net profits from retail banking, compared with 15 percent
at the time.
The first half of 2007 showed the bank closing in on that target,
as the figure increased to 26.9 percent, compared with 21.9 percent
in the first half of 2006. And the company’s retail banking
business is where S&P analyst Yoshizawa said MUFG needs to
continue to focus.
MUFG reported net profit for the first-half period down 49 percent
to ¥256.7 billion, but net profit at its retail banking business
increased by ¥23.7 billion to ¥192.8 billion, an increase of 14
percent from the same period in 2006. This was driven by an
increase in deposit income and steady growth in investment product
sales. There were also increased commissions from the sale of
investment products, which were up 5 percent.
Yoshizawa said: “We see that the performance itself was not so bad.
If you look at the bottom-line figure it shows a decline but it
shows a significant loss because of loan loss provisions.”
In September, the bank started a significant reorganisation of its
cards and consumer businesses. Going forward, there will be clearer
dividing lines between the various subsidiaries, with bank
customers handled by Bank of Tokyo-Mitsubishi UFJ, and non-bank
customers such as credit cardholders handled by UFJ Nicos, Japan’s
largest card company. UFJ Nicos has 26 million cards issued and
gross billings of ¥7.1 trillion.
Instalment finance will be provided by Jaccs, in which MUFG has a
20 percent stake, while consumer financing will be
provided by Acom, in which MUFG also holds a 20 percent interest.
UFJ Nicos’s performance was one of the main reasons MUFG’s figures
were so bad in the first two quarters of 2007 – it made a net loss
of ¥119.9 billion, compared with a loss of ¥54.2 billion over the
same period in 2006.
Overcrowded consumer finance market
The combination of government legislation limiting the amount of
interest financial companies can charge consumers, an overcrowded
consumer finance and lending market and the US subprime crisis were
all factors that conspired against MUFG in the first half of
2007.
It was not the only bank that suffered: Mizuho Financial Group
posted a 24 percent drop in profits to ¥399 billion and Sumitomo
Mitsui Financial, Japan’s third-largest bank, registered a 30
percent decline in profit.
Compounding the situation is the fact that retail banking
competition in Japan is set to increase further with the entry of
foreign banks into the market. ING Direct, GE Money and HSBC are
all pushing ahead with plans to expand in Japan (see News digest).
There is another cloud on the horizon for the industry: the
impending privatisation and entry into the lending market of Yucho
Bank, an offshoot of Japan’s Postal Bank (see RBI 578). The state-owned Japanese
postal and savings business is prevented by law from offering loans
in the form of mortgages or consumer credit. Under current rules,
it can use depositors’ money only to lend to the government.
Yucho Bank has a potential branch network of 24,000, a network that
would dwarf any of its privately owned Japanese compatriots, while
its ¥247 trillion assets, based on 2005 estimates, would make it
the world’s largest bank.
MUFG, along with all Japanese banks, already have to fight tooth
and nail for market share. With a player as big as Japan’s Postal
Bank, it would become even tougher.
Loyal and local customer base
Even outside the major metropolitan areas such as Tokyo, Osaka and
Nagoya, where banks could seek to improve market share, competition
is fierce among regional banks, which have a loyal and local
customer base. Even a bank of MUFG’s size and scale would struggle
to wrestle business from them.
Yoshizawa at S&P said: “There are limited opportunities for
growth. Demand abroad is very limited, so the only place they could
increase is in the retail business, selling investment trusts or
increasing the volume of mortgages. That’s why they said they would
shift their resources to retail – they may face difficult
challenges with Postal Bank and existing Japanese banks with a
strong foothold in regional banking.”
Another of the bank’s ambitions when it formed was to move back
into the international markets and establish itself as one of the
world’s global banking giants. It set itself a target of generating
20 percent of its gross profits from overseas by 2010, up from the
current 15 percent.
That is a modest figure compared with international banks such as
HSBC and Citibank, both of which are aiming at 60 percent. The
difference reflects problems Japanese banks had in the late 1990s,
and their subsequent focus on the domestic arena.
MUFG will look to focus most of its international efforts on the
countries in the surrounding Asia-Pacific area, where it generates
4 percent of its operating profit. Kuroyanagi said: “I wouldn’t say
we are inactive in the United States and Europe, but considering
the economic growth, our primary focus currently has to be Asia.
Also the impact of the subprime loan problem requires careful
monitoring for a while.
“In the United States and Europe credit rating agencies’ outlooks
have gradually become more severe. We have been increasing our
lending to non-Japanese corporations in the United States and
Europe, but we have been taking credit ratings and other things
into consideration and lending to companies that we believe have
solid creditworthiness.”
MUFG has invested over $1.2 billion in China, with branches in
Beijing, Tianjin, Dalian, Shanghai and Shenzen. It is soon to open
another in Guangzhou, in the south of the country.
The bank holds a 0.2 percent stake in Bank of China and provides
financial services to Japanese business clients in China. Its main
operation outside Asia is its Union Bank of California
subsidiary.
Subprime crisis is an issue
Yoshizawa said that while the company remains cautious about
lending in countries where the subprime crisis is an issue, there
is no reason why it cannot push towards the 20 percent figure with
growth in Asia.
He said: “We think it is achievable as it has a strong presence in
the Asia-Pacific region and many banks are expanding into these
countries. It should be easy to get the business, particularly as
more and more Japanese manufacturing companies establish themselves
in the Asia-Pacific region. So the figure is probably achievable,
but it will come mainly from Asia-Pacific rather than
Europe.”
