Japan Investment Banks Once Ugly Sisters Become Cinderellas

Investment banks are among the first and biggest beneficiaries of Japan’s new economic-stimulus policies, known as Abenomics.

Since Prime Minister Shinzo Abe came into office in December with a plan to end more than a decade of deflation, banks’ underwriting business for both equity and bonds is soaring. Companies have more than tripled sales of stocks to 1.7 trillion yen ($17 billion) so far this year compared with the same period in 2012, according to data compiled by Bloomberg. Corporate bond issuances climbed to 3.1 trillion yen, the best start to a year since 2009, the data show.

Investment banks are already enjoying rising brokerage-fee income as the Abe-driven stock market rally increases trading. Nomura Holdings Inc., Japan’s biggest securities firm, today reported the highest quarterly profit in seven years, beating analysts’ estimates.

“This is the industry that’s benefiting from Abenomics,” said Shinichi Ina, a bank analyst at UBS AG in Tokyo who added Nomura to his coverage in April with a buy rating. “Trading volumes have gone up, which means brokerages can get more fees. Next we’ll see the primary market come to life as companies issue more stocks and bonds to raise funds.”

Abe’s Liberal Democratic Party won an election in December with a three-pronged strategy of fiscal spending, monetary easing and deregulation to spur investing and hiring.

‘Third Arrow’

The government unveiled 10.3 trillion yen of spending in January, and the Bank of Japan this month said it will double the monetary base within two years. Japanese Bankers Association Chairman Takeshi Kunibe earlier this month urged Abe to follow through with the “third arrow” of his policy that includes pledges to reduce regulations, boost corporate investment and increase trade, which haven’t yet been enacted.

Japan’s Topix Index of shares jumped 61 percent since his campaign promises in November, as foreign investors bought into the market. It slipped 1 percent by the close in Tokyo.

The Topix Securities and Commodity Futures Index, which includes the country’s major brokerages, is the biggest gainer among the 33 groups on the benchmark gauge since mid-November, surging 172 percent. That marks a turnaround from 2011, when the industry was the worst performer, slumping 50 percent as companies shunned the stock market after a record earthquake and Nomura and closest rival Daiwa Securities Group Inc. reeled from faltering overseas expansions.

IPOs Rise

The 1.7 trillion yen of equity offerings underwritten in Japan this year is the most since 2010, data compiled by Bloomberg show. So far this year, 18 companies have priced initial public offerings, up from 15 in the same period of 2012, the data show.

Nomura banker Satoshi Shiomi is trying to woo companies that may eventually list their shares by inviting them to give three-minute presentations on their business strategies to about 70 stock exchange officials, lawyers, accountants and private-equity firms, followed by questions and answers.

“Abenomics is motivating more firms to consider IPOs,” said Shiomi, 28, who started the 7 a.m. weekly events in January. About 50 Japanese companies have attended so far, including Shift Inc., a software-testing company started in 2005. Shift hired Nomura as the lead underwriter for an IPO planned for early next year, said Masaru Tange, the 38-year-old CEO and founder of the Tokyo-based company.

Higher Profit

Nomura’s net income more than tripled to 82.4 billion yen in the three months ended March, the highest since the quarter ended March 2006. Daiwa may report quarterly profit of 25 billion yen, the most in three years, on May 1, according to the average estimate of analysts surveyed by Bloomberg.

Shares of Nomura have jumped 167 percent in the past six months and traded 0.7 percent lower to close at 762 yen. The stock tumbled to 224 yen in November 2011, the lowest in at least 37 years. Daiwa has gained 163 percent in six months and slipped 1.1 percent today.

“Thanks to Abenomics, the business and market environment has largely improved and we have benefited greatly from that,” Nomura Chief Operating Officer Atsushi Yoshikawa said on a call with analysts today. Still, he added, it’s too soon to be optimistic about global business.

Confidence among financial-products dealers rose by a record last quarter, according to the Bank of Japan’s Tankan business survey. The sentiment index climbed to 60 from minus 28, the biggest jump since the central bank began compiling the data in December 2003.

Mizuho’s Turnaround

Mizuho Financial Group Inc.’s equity sales team is getting swamped with inquiries from overseas investors -- a turnaround from a year ago, said Mikihiko Kitano, a spokesman for the securities unit of Japan’s third-biggest bank by market value.

“Our analysts used to struggle to get appointments with these clients,” Kitano said, adding that customers have been reactivating dormant trading accounts. “Now we’re trying hard not to turn down their offers to meet.”

The firm plans to hold its Mizuho Investment Conference in September in Tokyo in response to demand following a similar gathering in February, Kitano said. It will invite more than 250 overseas investors, up from 170 at the previous event, he said.

Investment-bank hiring is also picking up, according to executive recruiter John Byrne, 35, a partner at Tokyo-based Ascent Global Partners who as recently as November considered leaving equities recruitment because business was so bad.

“My work is much busier right now,” he said, adding that recruiting season, which usually lasts from January until June, will probably continue to September this year. “Japan used to be the ugly sister of Asia, but now it’s the Cinderella.”

Hiring Graduates

Securities units of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho, Japan’s three biggest banks, plan to increase the number of graduates they recruit next year, according to spokesmen at the Tokyo-based firms. Daiwa also targets an increase, as do Okasan Securities Co. and Tokai Tokyo Securities Co., spokesmen said.

SMBC Nikko, the brokerage unit of Sumitomo Mitsui, plans to add 100 equity and bond sales staff, traders and bankers in its offices overseas within three years, Chief Executive Officer Tetsuya Kubo said in an April 17 interview.

Not all analysts are optimistic that brokerages will continue to rally. Azuma Ohno at Barclays Plc in Tokyo says growth at securities firms hinges on whether they can convince Japanese households to move their savings into riskier assets.

“Individual investors must be very skeptical given that they haven’t taken action yet despite the spike in stock prices,” said Ohno, who has a sell rating on Nomura and Daiwa. “We have to wait and see if this favorable market environment will encourage them to move their funds.”

Hoarding Cash

Households, used to deflation, kept more than half of their 1,547 trillion yen of financial assets in cash and less than 7 percent in stocks as of Dec. 31, central bank data show. Individuals sold a net 2.5 trillion yen of Japanese stocks since mid-November, according to the Tokyo Stock Exchange.

Locals still remember the collapse of the country’s asset-price bubble more than 20 years ago. The Nikkei 225 Stock Average remains 64 percent below its 1989 peak.

Yoshio Emoto, 63, who owns an eel restaurant called Matsuyoshi in Tokyo’s financial district, doesn’t see a return to the bubble days of old. He said sales have been declining since Yamaichi Securities Co., then Japan’s fourth-biggest brokerage, collapsed during the country’s banking crisis in 1997 and Lehman Brothers Holdings Inc.’s failure triggered the global turmoil of 2008.

“Things aren’t getting better at all,” Emoto said. “I don’t smell any bubble. All I smell is eel.”