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Competitiveness Analysis and Proposal for Japanese Banks

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Xiao HUA

on 15 July 2013

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Transcript of Competitiveness Analysis and Proposal for Japanese Banks

Competitiveness Analysis
and Proposal for
Japanese Banks

Part 1. Overview of Japanese economy
   & effects on banking sector

The World Bank cut its outlook for global growth, projecting that the economy is likely to expand more slowly this year given the deeper-than-expected recession in Europe and recent slowdown in some emerging markets.
An economist at the World Bank is quoted as saying,
“What we‘re seeing now is more in line with the underlying growth potential,” “Therefore, this is a case of moving towards the new normal of the post crisis.”

Part 2. Diagnosis of Japanese Banks

Part 3. Global Comparison
part 4. Proposal
Part 1. Overview of Japanese economy
   & effects on banking sector

Part 2. Diagnosis of Japanese Banks

Part 3. Global Comparison

Part 4. Proposal

PEST-"T" Technological Factors
PEST-"P" Political Factors
PEST-"S" Sociocultural Factors
PEST-"E" Economics Factors
Times 2013/6/13” 'New normal': World Bank cuts growth outlook”

[Key words]

Minimum capital requirements for banks
 “Basel III”

Regulation on proprietary trading
      “Volcker rule”

⇒In part 1. we show the overview of this “new normal” by using PEST analysis.

Improve organizational environment
Development of overseas business
Raising ROE
[Key words]

Three arrows
1.Aggressive monetary policy

2.Flexible fiscal policy : JPY 10tn stimulus

3.Growth strategy : Key for long term success
          矢印 や

1. Develop Overseas Business
2. Improve Organizational Problems
3. Abenomics
4. Raise ROE

[Key words]

Rapidly aging society

Unstable social security system

[Key words]

Advanced and complex system
Algorithm trading / High frequency trading

Development of financial engineering

Excessive specifications・/ くcustomer-friendly facilities

Significance of develop overseas
Mainly comes from the needs from enterprises with expanding overseas business
It has been one of the fattest growing source in bank’s revenue

Most common barriers and challenges
Local Regulation limits
Competition from local banks
Risk management

Future trend: 1)Locally incorporation  
2) Acquisition

Case Study:
Mizuho Corporate Bank in China
Integration of banks and securities
Organizational problems
Rising yields/Abenomics
Low dependence on overseas markets
Positives & Negatives

Case Study
Mizuho Corporate Bank in China
The first Japanese financial institution to build a local incorporated subsidiary in China.Proved its risky decision with growth of over 1000 staff and a net work of branches in 15 cities.
Strengthening of Securities Business Provision Structure
Enhancing the investment business in Japan
Rationalizing and streamlining management infrastructure.

Benefits: looser regulation limits, easier to build up brand, legally independent to parent bank etc

Challenges: higher capital requirements and strict LDR , the need to formalize internal procedures and controls (Localization),etc

Collaboration among Banking, Trust Banking and Securities Businesses
Positive Basel III
Fill in loopholes in global financial regulation

the plan devised to maintain and build competitive advantage over the competition.
the way the organization is structured and who reports to whom.
the daily activities and procedures that staff members engage in to get the job done.
Shared Values:
called “super ordinate goals" when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic.
the style of leadership adopted.
the employees and their general capabilities.
the actual skills and competencies of the employees working for the company.
Basel III Objectives
Strengthen global capital and liquidity regulations, with goal of creating a more resilient banking sector

Improve the banking sectors ability to absorb shocks arising from financial and economic stress
Basel III: 3 Pillars

Pillar 1: Capital and risk coverage

Pillar 2: Risk management and supervision

Pillar 3: Market discipline

Structure & Style
Research by Khadijja Aslam (2008) reveals that changes in corporate governance style of Japanese banks did play a positive impact in influencing a competitive and providing organizational recovery
-Some Japanese corporate tradition, like amakudari, does not yield any competitive advantage
-Attempts required in 1)Corporate culture unitization 2) Internal control.3) Centralization of leadership and Decentralization of power

Structure & Style
-Establishment of corporate governance system in M&A
Domestic: important to develop a new culture and system instead of compromise and power fighting.
International: International integration is more complex as it involves the institutions to adapt to different cultures, languages, currency, regulatory and supervisory structures. It also involves for higher risks in terms of political , social and economic infrastructures of the international location and foreign exchange risk.
Staff & Shared Values
 Bilingual and multicultural understanding employees
More result-orientated, performance based compensation
Employees originally from different sources inside the group should be united for one shared value.
Abenomics aims to revive the sluggish economy with "three arrows": a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan's competitiveness.
Japan should consider
lowering its corporate tax rate
as a part of its growth strategy to attract more foreign investment, an economic adviser to Prime Minister Shinzo Abe said
If Abenomics works and the economy moves into a period of sustained higher growth,
Japanese banks could ultimately benefit
. Greater corporate appetite for investment should allow banks to
charge more for loans.
On the plus side
, a surging Nikkei 225 stock average has increased the value of banks’ holdings of Japanese shares and boosted sales of investment trusts, bringing in more fee income.
Fewer overseas branches, MUFG has the most overseas
branches in Japan is 80. while HSBC’s is 10,000.

10,000 branches.

Based on 2012

Japan banks’ total overseas revenue is under 30%.

Overseas consolidated loans are less than 20% of the total.

Banks are expected to generate solid revenues from their overseas businesses for growth and domestic lending could help contribute to increased revenue for the current year.

Private demand has collapsed as investors have increasingly started to believe that the Bank of Japan through its purchases will actually achieve its new stated inflation target of 2 percent, a slump in demand that some have called a "bond buyer's strike.“

Unlike other countries, the bonds are almost all owned by Japanese, mostly mega banks and other major financial institutions. Only 8.7 percent is held by overseas investors, according to the Bank of Japan.
Japanese bond yields inch up.
Comparison of the Earnings structure of major banks by country/region

Higher interest rates, short-term loss but long-term gain
Components of Low ROE:

Higher earnings impact from higher interest rates
The government’s bond buying program is pushing inflation higher and lowering bond yields. While JGB portfolios will have unrealized losses, it will have a positive impact by boosting net interest income. This means a rise in interest rates will have an overall positive impact on earnings
Simple calculation: 50bp shift in yield curve (impact of interest rate rise) would raise 3/14 average ROE from 7.8% to 9.5% for the three megabanks
Exploit regional knowledge of corporate/private clients
Increase services to SMEs
: Advise SMEs on how to identify opportunities for growth
Make lemonade
: “When life gives you a lemon, make lemonade” – Japan is confronted with a rapidly aging population. Small banks can offer services for organized succession procedures within smaller companies.
Venture capital
: Given the smaller banks closer ties to the community and knowledge of regional economic structures, they are better able to manage risks associated with venture capital financing.
Balancing risk and return
New forms of financing
Low ROE component:
Increase in JGB holdings
Diversified loan portfolio
: Japanese banks will have to continue to diversify their loan portfolios by offering new forms of financing
Low ROE component: Trading revenue
Japanese Government Bonds (JGBs): When the gap between loans and deposits widened, banks started substituting public lending as a means of dealing with the deposit overhang and offset weaker earnings at their core lending businesses. Of course, the rather narrow spreads between government bonds and deposits could not compensate for the overall loss in profitability.

Trading: Large banks boosted non-interest income (income other than JGBs and loans) by stepping up their asset management services and expanding into market making or derivatives trading. However, trading revenue suffered following the financial crisis

Smaller banks had fewer options and expanded into metropolitan areas (loans to SMEs and other riskier businesses), increasing competitive pressures and squeezing margins even further

Bank management should be disciplined in the following three ways:
1)Capital market discipline
2)Disciplinary influence of market competition
3)Supervision by regulatory authority

It is believed that the lack of adequate governance at Japanese banks accounts for the fragility of the banking sector, including the NPL problem

The situation may get worse as banking consolidation continues.

Case Study: Mizuho Merger in 2000
“When you re being pulled in three directions, it is hard to move forward”

After consolidation:
1) Technical aspect:
- ATM Transaction errors
- Delayed automatic debits
- Insufficient testing period for unified operation and load tests
2) Co-operative aspect (principal causes):
- Delayed decision on the system integration scheme: the three banks simply could not agree on whose computer system to adopt post merger
- Problematic management organization: rivalry and power struggles among the three banks resulted in delays and left no time for testing
- Human resource chaos: the management committee of the new bank was structured to include an equal number of officers from the three banks as a compromise to resolve the power struggle.
                         The cost of merging reminds today….

Global Comparison
Low dependence on overseas markets

Globalization of Foreign Banks
Started亜as early as in 15th century by Italian banks.
American banks started establishing global presence in the 1960s
From 1990s to just before facing a financial crisis in 2008 the globalization of banking significantly expanded.
Case study:
HSBC is a global bank which ranked as 4th globally and a number 1 global bank in Europe.
Based on its solid portfolio, it is evaluated as an European bank who easily overcome global financial crisis.
HSBC has 10,000 branches in 86 countries.
→In 2008 financial crisis, losses in Americas were offset with profit in Asia
Case study:
BNP Paribas
BNP paribas is a ranked 8th globally, based on a portfolio it is evaluated as a bank who also easily overcome the global crisis in Europe from wide area of presence in regions like Asia and Africa.

Case study
: Santander
Santander is ranked 9th globally and it easily overcame the financial crisis.
Out of 37countries,It has 13,660’s branch.
These three banks show how much overseas presence is important at times like financial crisis.
From a case of Santander, as it expanded from a small bank to a global bank, foreign branches profit made up 1% and grew to 14%
Looking at previous cases by global banks, it is expected that banks globalization could be achieved in a short period of time.

Global Comparison
Rising yields/Abenomics

JGBs yields have recently increased.High level of government debt raisng the risk premium on government bonds is a factor supporting higher yields. JGBs yields have been low by international standards. This is due not only to weak inflation and expected low growth rates as well as the bank of Japan’s low interest rate policy, but also to the fact that nearly all JGBs are purchased by domestic investors.
Domestic buyers hold 94.8% of JGBs, and compared the other major countries, Japan’s ratio of overseas holding is extremely low.
Global Comparison

Low ROE compare with other countries

Global Comparison
Organizational problems

Case study:
BNP Paribas
They choose for a leader in overseas branch with deep location knowledge and connections

Case study:
They have 13,660’s branch out of 37 countries .By seating a local employee in a management position, productivity and motivation work reported to go

Thank You !
by Team 3
Full transcript