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Japan: Bank Services With A Smile?


Pedestrians wandering into MTFG Plaza in Tokyo's hip Shibuya district could be forgiven for thinking they are about to enter a chic boutique. The building was designed by an American architect and features an ultramodern, snow-white exterior embedded with thin strips of multicolored lights. But instead of designer brands, what's for sale is an array of home loans, mutual funds, insurance, annuities, brokerage services, and plain old savings accounts. Just ask at the concierge desk. The banking supermarket is one of the first signs of a new strategic focus on retail customers by Mitsubishi Tokyo Financial Group Inc. (MTF). Since the remodeled branch reopened in December, it has kept its rank as the bank's busiest in Japan.

While financial one-stop shops are nothing new in much of the industrialized world, the concept is just now taking root in Japan, where the biggest banks have traditionally catered to the needs of corporate clients at the expense of individuals. Indeed, retail customers have long been subjected to unhelpful tellers, a poor selection of financial products at uncompetitive rates, and automated teller machines that shut down after 6 p.m. But after spending the 1990s digging themselves out of a pile of bad loans to Japan Inc., the major banks have suddenly seen the wisdom of emulating titans such as Citigroup (C) and HSBC Holdings PLC (HBC), which are world leaders in retail. "Our first goal is to be the most profitable retail bank in the world," says Tetsuya Wada, a director in charge of MTFG's retail banking business. "The second is to keep that No. 1 position for the next 50 years."

Wada's bravado is a result of MTFG's plan to execute a $29 billion friendly merger with UFJ Holdings Inc., Japan's fourth-largest bank and the big bank most focused on retail services. Although UFJ had to fight off a hostile counterbid from Sumitomo Mitsui Financial Group Inc. (SMFG), the merger is now scheduled to be completed in October. It would make the new Mitsubishi UFJ the world's largest bank, with $630 billion in assets.

The big new investment in retail is one sign Japan's major banks have put most of their troubles behind them. The long hangover from nonperforming loans is all but over. As of December, Merrill Lynch & Co. (MER) estimates the bad loan ratio at Japan's major banks dropped to 3.8%, down from a peak of 8.4% in 2002. And after some serious belt-tightening, Japanese banks now have the lowest cost ratios in the developed world, according to Goldman, Sachs & Co. (GS) Yet bankers can't revert to the old ways of doing business. Their best blue-chip clients are awash in cash and have less need for loans, while troubled borrowers have been cut off from fresh lines of easy credit. What's more, all-time-low interest rates in Japan translate into puny profit margins.

SAVINGS TO BE SNAGGED

So the big banks -- MTFG, UFJ, SMFG, and Mizuho Financial Group -- are in need of a new business model. "It's about margins," says John Sequeira, a partner at Bain & Co. in Tokyo. "Lending to corporates isn't a good business to be in right now, so Japan's banks are looking elsewhere." Where they are looking first is retail banking. The industry got some help in December from the government, which rescinded regulations that forbade direct sale of stocks and bonds to retail bank customers. That came on top of a decision three years ago to allow banks to market insurance products such as annuities. Those reforms, plus government plans to scale back bank deposit insurance guarantees starting on Apr. 1, are expected to free up some of the $13.5 trillion of personal assets in Japan, over half of which is locked up in low-yield, long-term deposits, much of it in the postal savings system.

Standard & Poor's (MHP) estimates that, on average, retail banking contributes no more than 30% of total profits at Japanese banks, compared with 70% at Bank of America Corp. (BAC). The proportion for Mitsubishi and UFJ is just 15%, which the managers of the combined group hope to raise to 35% in the next few years. A big step toward that is the MTFG Plaza in Tokyo, one of nearly 100 such branches -- out of a total of 712 slated to survive the merger with UFJ -- that the bank expects to open across Japan by 2007. Inside, each is split up into sections offering different services, usually including a comfy lounge for private bank clients and a satellite office of MTFG's house broker, Mitsubishi Securities.

Even before unveiling the remodeled branches, the bank had been turning its giant hull toward retail. In 2002 it formed Mitsubishi Securities, now Japan's fourth-largest broker, through the merger of four securities houses. The bank also has more than doubled the size of its home loan business since 2001, thanks in part to a high-profile "Meet MTFG" TV ad campaign. And the bank was the first in Japan to install biometric ATM machines that scan customer palms to provide account access. MTFG charges customers $95 to register for the palm-scanning ATMs, which are an extra security option in addition to PIN numbers. Last year its earnings in retail banking totaled a respectable $902 million. "While these services are very attractive to our clients, they are also very profitable," says Wada.

MTFG's rivals have been quick to respond to its retail push. Mizuho has opened Mizuho Investors Securities outlets at 31 of its 528 branches and plans to open 100. Mizuho also acquired a 4.92% stake in Nikko Cordial Securities Inc. in December, with which it may seek to market more financial products. Meanwhile, SMFG -- already the leading marketer of annuities, private pensions, and mortgages -- has begun selling foreign bonds at all its branches. And SMFG is in talks with Daiwa Securities Group Inc., Japan's No. 2 broker, about a merger.

NICENESS TRAINING

Of course, remaking corporate cultures that have long been largely indifferent to individual customers won't be easy. MTFG is transferring 300 employees from Mitsubishi Securities to help train bank employees in the brokerage business. And it has also set up an internal "retail academy" which, among other things, teaches staff to be nicer to customers. The academy, which has already graduated some 1,500 staffers, offers a range of courses from a single day to one day a week over three months.

Not all industry observers believe that blurring the line between banks and other financial companies is such a wise move. They say banks risk overreaching as they rush to be all things to all customers. And they may have trouble beating established brokerages such as Nomura Securities Co. at their own game. "It's hard to see the synergies from banking, the brokerage business, and insurance," says Yoshinobu Yamada, an analyst at Merrill Lynch Japan Securities Co. (MER) in Tokyo. "The one-stop shop isn't the answer."

Moreover, a real commitment to retail banking will require expensive new investment. Goldman Sachs estimates Mitsubishi UFJ would have to double its workforce, to 96,236, if it wants to provide the level of service to retail customers routinely provided by banks such as HSBC. "What the banks talk about sounds all good and well in theory, but serious implementation would require significant investment in branches and people," says David Atkinson, an analyst at Goldman Sachs in Tokyo.

Whether Japan's Big Three can reinvent themselves as profitable full-service financial supermarkets remains to be seen. Still, a shift toward more profit-driven growth, even if it is a bit awkward, signals the end of a long, painful period of retrenchment for Japan's banks.

By Ian Rowley in Tokyo


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