September 24, 2008 / 1:34 AM / 10 years ago

Back from the dead, Tokyo banks buy into Wall Street

TOKYO (Reuters) - Just a few years ago, Japan’s big banks teetered on the brink of collapse and came to symbolize the moribund state of the world’s No.2 economy.

Pedestrians walk past a signboard of a Mitsubishi UFJ Financial Group (MUFG) securities branch in Tokyo September 23, 2008. REUTERS/Issei Kato

Now, those same financial firms are helping reshape the global banking landscape.

Nomura Holdings (8604.T), Japan’s biggest brokerage, is snapping up the Asian arm of failed U.S. investment bank Lehman Brothers LEHMQ.PK for up to $525 million, and Mitsubishi UFJ Financial (8306.T), the country’s biggest bank, is buying up to 20 percent of Morgan Stanley (MS.N) for as much as $8.5 billion.

Those deals have fueled speculation that Goldman Sachs (GS.N), which like Morgan Stanley is transforming into a commercial bank, might turn to Sumitomo Mitsui Financial Group (SMFG) (8316.T), Japan’s third-largest bank, with which it has a long relationship.

Once considered too naive and cautious for the high-risk, high-return world of investment banking, cash-rich Japanese firms are once again aggressively pushing abroad.

“The balance of power in the global financial industry has changed dramatically over the past one to two weeks,” said Shinichi Ina, banking analyst at Credit Suisse in Tokyo.

“I don’t think anyone imagined a few months ago that Mitsubishi would be making Morgan Stanley into a group firm. I don’t think they could have imagined it themselves.”

Japanese financial firms have largely avoided the massive credit losses that tore through Wall Street. Unlike Western rivals, Mitsubishi UFJ and others have largely shied away from riskier investments since their near-death several years ago, when they needed massive injections of public funds to stay afloat.

Now, the upheaval on Wall Street has changed everything.

While Lehman Brothers has filed for bankruptcy, Merrill Lynch & Co MER.N is to merge with Bank of America Corp (BAC.N), and the U.S. Federal Reserve has turned Morgan Stanley and Goldman into bank holding companies, killing off the investment banking model that dominated Wall Street for more than 20 years.

DEPOSITS NEEDED

Morgan Stanley’s deal with Mitsubishi UFJ will speed the U.S. firm’s transformation into a commercial bank, improving its chances for survival. The deal will give Morgan Stanley access to Mitsubishi UFJ’s $1.1 trillion in bank deposits.

“In this new environment I think people have recognized the importance of having stable investors and affiliations with large deposit-taking institutions, and MUFG ranks up there,” said Jason Rogers, credit analyst at Barclays Capital.

In turn, Mitsubishi UFJ will get a seat on Morgan Stanley’s board and potential for future business tie-ups.

Saddled with a faltering economy and a declining population at home, Japanese financial firms are increasingly looking for growth opportunities abroad.

Overseas acquisitions by Japanese financials already total $12.5 billion this year, up four-fold from the same period last year, according to Thomson Reuters data.

Mitsubishi UFJ’s purchase of the Morgan Stanley stake would be the biggest overseas acquisition by a Japanese financial firm.

Mitsubishi UFJ last month bid $3.5 billion to buy the remaining 35 percent it doesn’t already own of U.S. regional bank UnionBanCal Corp UB.N, and analysts have said it could acquire another regional lender in the United States.

“Clearly the Japanese banks have an opportunity, given that they have been less badly damaged by the broader credit crisis than some of their international peers, so they have the resources to make investments overseas at what appear to be attractive prices,” said David Marshall, head of Asia-Pacific Financial Institutions at Fitch Ratings.

EYES ON SMFG, GOLDMAN

Analysts now wonder if Goldman Sachs may turn to SMFG.

“SMFG has always had very close ties with Goldman Sachs so you can’t rule out some sort of a more comprehensive tie-up there,” said Barclays’ Rogers.

In 2003, Goldman bought 150 billion yen of SMFG’s convertible preferred shares. In the 1980s, SMFG’s predecessor bank helped bail out Goldman.

But the question remains about how much Japanese financials will actually gain from their overseas shopping. Part of the problem may be the difference in culture.

Kirby Daley, senior strategist at Newedge Group in Hong Kong, said Japanese banks’ recent purchases could be driven by wanting to keep up with the pace of internationalization.

“Cultural issues may plague the integration of the old U.S. investment bank mentality versus the Japanese banking mindset,” he said.

In the straight-laced world of Japanese banking, stability and seniority are highly valued, unlike the U.S. model that emphasizes individual merit and profitability.

“The cultures are so different,” said Ina of Credit Suisse.

“You have the greedy investment bank and Mitsubishi, which is considered to have the most conservative culture among Japanese banks.

“To effectively leverage the strength of the investment bank I think you need a certain degree of distance.”

Additional reporting by Tony Munroe in HONG KONG; Editing by Ian Geoghegan

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