Exclusive: Mitsubishi UFJ, Morgan Stanley eye deal to serve hedge funds

NEW YORK Wed Jan 29, 2014 6:29pm EST

A pedestrian is reflected on a logo of Bank of Tokyo-Mitsubishi UFJ in Tokyo December 13, 2012. REUTERS/Yuriko Nakao

A pedestrian is reflected on a logo of Bank of Tokyo-Mitsubishi UFJ in Tokyo December 13, 2012.

Credit: Reuters/Yuriko Nakao

Related Topics

NEW YORK (Reuters) - Morgan Stanley and Mitsubishi UFJ Financial Group Inc are considering forming a partnership to provide administrative services to hedge funds, a senior official of the Japanese lender said on Wednesday.

The two banks have been examining ways to collaborate in that area since MUFG purchased a fund-servicing business last year, Masaaki Tanaka, deputy president of MUFG, told Reuters in an interview.

"Obviously Morgan Stanley deals with a lot of hedge funds, and they need administrative services," said Tanaka. "We are discussing if there is any coordination (we can) create with Morgan Stanley. There are a lot of discussions around this right now."

Morgan Stanley and MUFG already have several partnerships, stemming from a $9 billion lifeline MUFG provided the Wall Street bank at the height of the financial crisis. MUFG now owns 22 percent of Morgan Stanley, making it the bank's largest shareholder.

The two banks first announced a joint venture in 2010 that focused on trading and investment banking in Japan, but the relationship has expanded since then.

The two banks now collaborate on mergers, underwriting, trading and loans in the U.S. as well as Japan, Tanaka said. They banks have a list of 150 major U.S. corporations that they are targeting for investment banking business.

"We will present ourselves and Morgan Stanley as a single team," said Tanaka. "Morgan Stanley will provide very sophisticated products and services, and we will provide our balance sheet."

As a recent example, Tanaka cited the $13.6 billion purchase of Beam Inc by Suntory Holdings Ltd. Morgan Stanley had an investment banking relationship with Beam while MUFG had a banking relationship with Suntory, and was also able to provide bridge financing for the deal, he said.

In addition to the capital markets partnerships, MUFG also recently exited a wealth management joint venture in Japan with Merrill Lynch to partner with Morgan Stanley instead.

A hedge-fund servicing agreement between the two banks would work much the same way as their others do.

MUFG last year acquired Butterfield Fulcrum Group, which provides administrative services to $100 billion worth of client assets across 850 funds. Morgan Stanley has extensive relationships through its prime brokerage business, which loans money and securities to hedge funds.

DEEPENING RELATIONSHIP

Despite recent progress in expanding their relationship, Morgan Stanley and MUFG got off to a rocky start. In early 2011, their Japanese securities joint venture lost about $950 million through bad trades in a single quarter.

MUFG also suffered for some time as Morgan Stanley's largest shareholder. Since MUFG's investment, the Wall Street bank has faced volatile markets, regulatory pressures, strategic changes and a ratings downgrade, with its share price trading well below book value at times.

But Morgan Stanley's shares were among the best performing financial stocks, up 64 percent last year, as the bank completed its acquisition of the Smith Barney business from Citigroup Inc, providing more stable income to offset unpredictable swings in trading and investment banking revenue.

Tanaka acknowledged that the two banks "had a lot of bumpy experiences" and that there was initially a great deal of skepticism on Wall Street about how their partnership would fare. He said MUFG management has had many tense conversations with Morgan Stanley management through the years.

"Obviously when you're kind of husband and wife, there are things that you have to discuss between you two," he said. "In the middle of that, it's never an envious position. Nevertheless, we have been able to address all those issues together and provided solutions and so on. This relationship has been deepening very, very well."

Morgan Stanley executives have also been touting the deepening relationship with MUFG for the past few years, highlighting it as an area for revenue growth.

"That is a partnership and a relationship on the business side that will continue to grow for many years ahead, and is not something that just occurred in the financial crisis and will disappear," Gorman said at a conference in June. "This is something which is very long-term."

The relationship has started to bear fruit, Tanaka said.

In 2013, nearly 10 percent of Morgan Stanley's net income came from joint ventures with MUFG, said Tanaka, who sits on Morgan Stanley's board. For the first six months of MUFG's fiscal year, which begins in April, about 9 percent of its net income came from Morgan Stanley partnerships, he said.

(Editing by David Gregorio)

FILED UNDER: