Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Wonders will never cease. Japan's investment banks are making what look like successful forays overseas.

While Nomura and Daiwa struggle to reconcile the high cost of investment-banking salaries with the global trading slump that's bedeviled Wall Street, Mizuho Securities is expanding. The brokerage unit of Mizuho Financial Group plans to raise its workforce in the Americas by 10 percent (50 to 60 bankers and back-office staff) and expects to remain profitable abroad this fiscal year, Chief Executive Officer Tatsufumi Sakai told Bloomberg News.

Mitsubishi UFJ and Sumitomo Financial, too, are increasingly lending more abroad. That's testament to one of the few advantages that negative rates have conferred on Japan's banks and insurers: the ability to build overseas heft cheaply.

Reaching Out
Japan banks boosted their share of international loans in most of Asia between 2007 and first half of 2015
Sources: Bank of International Settlements, Goldman Sachs

The contrast with Nomura and Daiwa is also evidence of an uncomfortable truth for competitors: It's hard to build and maintain a global investment-banking franchise without the balance-sheet muscle that comes from a commercial deposit-taking and lending operation. That's a lesson that Goldman Sachs is learning, with plans to start an online savings bank for the masses that, according to the Financial Times, will accept deposits of as little as a dollar.

The deposit backing of a commercial-banking arm has long been an advantage for financial institutions in landing deals. That ability has been crimped at many Wall Street banks, which have been forced by regulation to conserve more and more of their capital while taking on less risk. 

Japan's financial institutions have been desperate for growth, and there's nothing like poor returns at home to encourage a focus on new horizons. ``Mizuho can cross-sell investment banking to its commercial banking clients, and ultra-low rates in Japan means it needs to expand overseas,'' as Bloomberg Intelligence analyst Francis Chan notes.

 Mizuho, Sumitomo Mitsui and Mitsubishi UFJ have won market share in Asia, with all three megabanks having bought stakes in Southeast Asian banks. As Japanese companies keep up the search for overseas assets to offset dismal growth prospects at home, banks with the biggest balance sheets will be increasingly best placed to help finance those deals.

Looking Abroad
Japanese companies have been on an overseas buying spree in the past few years
Source: Bloomberg

Mizuho Financial's overseas loans were 31.5 percent of the total as of Dec. 31, up from slightly more than 20 percent in 2013. Overseas loans account for almost 40 percent of the total at Mitsubishi UFJ, the nation's biggest bank.

Reaching Out
Japan banks boosted their share of international loans in most of Asia between 2007 and first half of 2015
Sources: Bank of International Settlements, Goldman Sachs

Mizuho Securities has hired 45 analysts, salesmen and traders in Tokyo, Hong Kong, New York and San Francisco since September, mainly for Japanese stocks. The brokerage, which employs 1,300 people overseas, formed an alliance earlier this year with Redburn Europe, a U.K. research and trading house. 

By contrast, Nomura is cutting about 1,000 people as it scales back European equities operations and some U.S. staff. Daiwa has also been weighing job cuts, with its pretax loss from operations abroad swelling by more than 40 percent in the three months through Dec. 31.

Wall Street banks may have shrugged off the threat to their global dominance from brokerages such as Nomura, but it would be premature to dismiss this Japanese incursion. While Mizuho may trail far down the league tables for now, a rival backed by a group with $1.6 trillion of assets isn't so easily repelled.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net