Daiwa SMBC says it is pursuing a new global strategy of targeting growth in Asia and internationally. Daiwa has hired Clarke Pitts from Mitsubishi UFJ Securities to head up equity derivatives, and Matthew Hargreaves, formerly at Calyon, to build the derivatives infrastructure team. Both will be based in London.
For the new derivatives business, Daiwa will make use of its platform in Japan, Asia and Europe.
Toshinao Matsushima, head of global markets in Tokyo, was quoted in a press release as saying: ôThe growth of derivatives is regarded as an essential part of DaiwaÆs global expansion. It is intended that we will offer a full range of high quality fixed income, equity and hybrid products, and will be utilising the best people in Europe, Japan and Asia to help us achieve this.ö
Eishu Kosuge, DaiwaÆs chairman & CEO in London, announced in the press release: ôThe full-line operation of a highly sophisticated derivatives business is a key project for us among the various global initiatives we are taking to reform our business model here in Europe and the Middle East, and also in Asia and Japan. Under Dominique's leadership, and with his in-depth experience, our derivatives team will strengthen our global management capability of derivative books, expand our product range to global clients, and deepen our services in related brokerage and investment banking operations worldwide.ö
Daiwa Securities SMBC is a joint venture between Sumitomo Mitsui Financial Group (the parent company of Sumitomo Mitsui Banking Corporation) and Daiwa Securities Group û which itself announced on Wednesday an increase in its shareholding in Vietnam's Saigon Securities.
Intriguingly, SMBC already has a derivatives house in London, SMBC Capital Markets, so there is speculation that it could merge with the new entity. SMBC Capital Markets describes itself as a ôprincipal market maker for interest rate swaps and currency derivativesö on its website.
SMBC is also taking a 2% stake in Barclays, a leading British bank, for around $1 billion. That follows a $1.3 billion stake taken in Merrill Lynch by Mizuho Financial Group earlier this year.
Japanese banks are known to be looking outside Japan for expansion opportunities, given the weak capital markets sentiment at home, and relatively cheap targets abroad. However, Reiko Toritani, a banking analyst at Fitch Ratings in Tokyo, says: ôUntil 2006, Japanese banks were repaying to the government the public funds which were injected into them to keep them solvent during the post-bubble years. Since the repayments came out of retained earnings, they currently donÆt have a great deal of spare capital to invest abroad.ö
According to Toritani, JapanÆs top three banks (Mizuho Bank, SMBC and Mitsubishi UFJ) have tier-1 capital ratios of 7%-8%, which is below the levels of their counterparts internationally. Japanese banks have also been hurt by exposure to subprime (although relatively lightly compared to many Western banks) and the regulatory changes to the consumer finance industry, capping interest rates. Thus, Mizuho Financial Group saw its net income cut by half in FY 2007/2008, while Sumitomo Mitsui Financial Group saw its net earning stay largely flat.
Toritani is also skeptical of the small stakes Japanese banks are acquiring in foreign players, estimating that something over 10% would be necessary to achieve a strategic alliance.
Despite these reservations, it's likely that the Japanese banks will continue to try to profit from the weakness of their international competitors and expand abroad where and when they can. After all, only 20 years ago, they were counted amongst the biggest and most profitable investment banks in the world.