TOKYO U.S. and European banks may dream of making it big in Japan, but tough local competition and costly past failures mean they will largely remain niche players in the world's second-biggest economy.
"It's ok for them to be in a niche market, to offer specialized products that the Japanese banks don't have, but if you want to do real banking it's almost impossible," said Kristine Li, bank analyst at KBC Securities in Toyko.
Instead, Western banks are targeting wealth management and pockets of investment and corporate banking activity, rather than attempting to offer a range of glitzy products to a wary market, said bankers at the Reuters Japan Investment Summit this week.
"You have to be patient, focused and not get ahead of yourself," said Robert Morrice, head of Asia Pacific for Britain's Barclays (BARC.L).
"The business tends to take longer to come together in Japan than it does in other areas. Investors take longer to trust. You're going to be there for the long haul, you have to service them for a long time," Morrice said.
With a massive, export-driven economy and scores of major companies such as Toyota Motor Corp (7203.T) and Nintendo Co 7974.OS, there are clear opportunities in both corporate lending and capital markets.
Japan is also home to a staggering $15 trillion in household financial assets, with more than half parked in low-yielding deposits. But it is also a mature, low-growth economy and bankers say the financial crisis has made many Japanese even more reluctant to invest their savings.
And the big three banks -- Mitsubishi UFJ Financial Group (8306.T), Sumitomo Mitsui Financial Group (8316.T) and Mizuho Financial Group (8411.T) -- have dominant market positions and sprawling branch networks.
Foreign banks also face cultural difficulties as the Japanese prize long-term relationships and care deeply about reputation.
Citigroup (C.N), for example, had its name tarnished in 2004 when regulators forced it to close its private banking business due to lax controls in the prevention of money laundering. It was punished again last month for the same violation and forced to suspend retail bank marketing activities for a month.
Citi spent 1.6 trillion yen ($17 billion) to buy Japanese broker Nikko Cordial in a deal completed just last year, but sold the brokerage this year for about a third of that -- essentially giving up trying to be a market leader across Japanese financial services.
TARGET THE RICH
Wealth management is one major area where Western banks do see opportunity in Japan, attracted by the size of household assets and nascent appetite for sophisticated products.
Standard Chartered (STAN.L) opened a wealth management business in 2005 and is targeting the mass affluent market, which it estimates at 12 million households.
Credit Suisse CSGN.VX launched a private banking business in Japan in May, joining European rivals UBS UBSN.VX, HSBC (HSBA.L) and Barclays in targeting investors.
They emphasize their experience and global reach, but lack the branch networks and local resources of Japanese rivals.
HSBC has so far opened seven branches, and reckons the market could support at least 30 outlets. But such expansion carries a big price tag, bankers say.
"The big challenge in Japan and in wealth management in particular is not growing the revenue ... the real challenge is how do you allocate your investment because the cost is quite high," said Patrick Gillot, head of Japan for Standard Chartered.
Barclays' Morrice said modest growth was the key.
"Our experience over 7-8 years has given us a good insight into how to incrementally grow the business in Japan," he said.
"Don't size the business for success from Day One, and try and be clear how bad it can be on the bad days."
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(Editing by Valerie Lee & Ian Geoghegan)