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.

Too big at home, too small abroad.

It's a dilemma facing Japan's banks but it shouldn't be a reason to hold back on international expansion, even if the nation is enjoying its best nominal economic growth since the 1990s.

Putting aside Japan's policy of negative interest rates and aging demographics, the country's three megabanks -- Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. -- are facing increased challenges from smaller lenders. Regional banks in Asia's second-biggest economy have expanded faster in the low-margin residential mortgage and small-business loan space, which unlike corporate lending (the specialty of big banks) is growing. Domestic advances are souring more slowly.

Overseas Experience
Nonperforming loans at Japan's megabanks have been falling at home, and rising offshore
Source: Daniel Tabbush, founder of the Tabbush Report and contributing analyst on Smartkarma.

The big banks have also been spending less on acquisitions abroad. Current transactions include a plan by Mitsubishi UFJ to establish a presence in Riyadh as Saudi Arabia prepares to list Saudi Arabian Oil Co., and moves by Mizuho into managing more corporate money overseas. Sumitomo Mitsui is on the look out for a North American bank.

As of June 30, Mitsubishi UFJ had about 40 percent of its loan book overseas, while that figure was less than 30 percent at both Sumitomo Mitsui and Mizuho, according to Bloomberg Intelligence.

Pull Back
Acquisitions by Japan's megabanks have slowed in recent years
Source: Bloomberg

It seems Japan's megabanks are undergoing something of a strategic rethink, moving into more sophisticated capital markets and away from plain vanilla lending. According to Fitch Ratings Japan Ltd.'s Naoki Morimura, offshore loan growth is now in the single digits, due in part to stricter global regulations around conserving capital.

Mitsubishi UFJ's ranking in global loans has slipped to 13th, from seventh place in 2016, data compiled by Bloomberg show. Sumitomo Mitsui ranks 29th so far this year; five years ago it made the top 10.

Retreating from corporate lending is a mistake. Wall Street stalwarts have deal-making and transaction banking all but stitched up and, as analyst Daniel Tabbush, who writes for Smartkarma, points out, it's questionable whether Japanese lenders have the necessary "highly service-orientated mentality" and streamlined thinking to win in that arena. Even though Mitsubishi UFJ has an overseas graduate program, neither it nor any of its big rivals have had a foreign CEO.

That's more of a strategy failing, and something lenders should work harder to address. Meanwhile, the incontrovertible fact remains: The future of Japan's megabanks lies offshore.

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

To contact the editor responsible for this story:
Katrina Nicholas at