If you can think about Japanese banks briefly without worrying about the looming problem of non-performing loans -- and I acknowledge this is a challenge -- the question is just what these institutions will look like when the mess is at last cleaned up.
Japanese banks have been consolidating at a phenomenal pace since the crisis of the late-1990s. The new names tell it all: Mizuho, Mitsubishi Tokyo Financial Group, UFJ Holdings Inc, Sumitomo Mitsui Banking Corp. None of these entities even existed a few years back. Where once there were 21 major city banks, there are now eight. And it isn't over yet. The announced goal has been six. It's likely that in the end there will be four major Japanese institutions, and some analysts think it may even come down to three -- Mizuho possibly being the final casualty.
Time for an interim report card, then. And we have an interesting one from James Fiorillo, senior analyst for financials at ING Baring Securities. "Consolidation," his latest piece of major research, is a thoroughgoing look at the operations, management, and strategy questions facing these big new boys on the block. It's the subtitle that draws attention: "Why it's not helping the banks." Fiorillo is as smart as they come among the foreigners dedicated to sorting through Japan's banking sector, and he's not impressed with what he sees. "Three years into the process, the consolidation of Japan's big banks has yet to yield any of the promised returns," Fiorillo begins.
It's a failure of focus, in Fiorillo's view. The new banks are looking at cost-cutting, for example, when the problem is not costs but low returns on gross assets, since so much of revenue comes from lending and so little from fee-based business. As Fiorillo points out, Japanese institutions are well ahead of leading US and European banks in terms of their "OHRs" -- the ratio of overhead to gross operating income.
The loan problem has been a major distraction. Banks are worried about asset quality and capital adequacy ratios when they ought to be doing long-term strategic thinking -- most of which is done at the Ministry of Finance in any case -- and consolidation has done nothing to improve things. Post-merger efficiencies -- combined staffs, systems, and so on -- have been elusive, as the computer failures at Mizuho this month demonstrate.
"Mergers have been rushed, defensive alignments driven by pressure from financial regulators and markets, not strategic considerations," Fiorillo concludes.
This is the kind of tough thinking that makes Fiorillo less than man-of-the-year among some of Tokyo's financial bureaucrats.
But amid all the detail and analysis in this commendable work, two things interest me most: what is not there at all and what is there and not said.
The report is problematic primarily because it lacks the perspective of history. It assumes no cultural dimension in the analysis of economic institutions -- and therefore isn't aware of the cultural bias implicit in its pages. The cost of these lapses is the absence of any notion of strategic design -- and who is doing the designing. The report is, altogether, a very American piece of work.
"The assumption is that Japanese banks can be understood entirely in the context of shareholder priority," a banking analyst in Tokyo tells me. "It's very Anglo-Saxon -- as if these banks were free-standing financial institutions given to purely rational management and maximum return on equity. They're not. They're different."