At a time when some foreign banks are cutting back in U.S. investment banking, Mizuho Financial Group is determined to grow its U.S. footprint.
Mizuho, Japan’s No. 2 bank by assets, has made significant inroads since paying $3.2 billion earlier this year to acquire a $36 billion portfolio of North American corporate loans from Royal Bank of Scotland. The Japanese bank obtained more than 70 corporate clients through the transaction and increased the size of its U.S. corporate loan book by 50 percent. More important, the corporate relationships established as a result of the acquisition have enabled Mizuho to increase its U.S. debt and equity underwriting business by at least a quarter so far this year as of mid-October.
Mizuho led or co-led the three biggest deals, including a $21 billion bond offering by Actavis to finance its purchase of fellow drugmaker Allergan in March. (The acquirer subsequently adopted Allergan’s name.) The bank this year ranks No. 12 in underwriting U.S. investment-grade debt as of mid-October, up from No. 16 last year, according to data provider Dealogic; the bank led or co-led 88 deals worth a total of $153 billion in that period. It moved up to No. 23 in high-yield debt, from No. 47 last year, after more than tripling the number of deals in which it was involved, to 25. Mizuho also sits in 15th place in underwriting equity capital market deals, after not doing a single deal last year and ranking a lowly 51st in 2013.
It helps that Mizuho is expanding at time when the U.S. market is red hot. Investment-grade bond issuance is running at the strongest pace in at least a decade, with volume rising 3 percent in the first nine months of this year, to $2.2 trillion, according to Dealogic.
“A lot of banks are exiting the U.S., and people are looking for other counterparties,” says John Koudounis, head of Mizuho’s securities and investment banking business in the Americas and a former fixed-income chief at ABN AMRO’s North America division. Mizuho plans to expand into asset management and retail banking in the U.S., he says, adding that “with the strength of the U.S. dollar, the American retail banking sector could prove to be attractive.”
Mizuho doesn’t rule out further U.S. acquisitions or partnerships. “We look at everything all the time,” says Koudounis.
The U.S. presents an attractive opportunity to Mizuho and other major Japanese banks. Mitsubishi UFJ Financial Group, Japan’s largest bank by assets, has said it may buy a U.S. asset manager and make small purchases in the U.S. retail banking sector. The bank, which owns a 22 percent stake in Morgan Stanley and full control of San Francisco–based Union Bank, in April recruited Stephen Cummings, a former UBS executive, as the first non-Japanese chief of its U.S. operations.
Japanese banks are eager to increase their overseas revenues because of continued slow growth and shrinking net interest margins at home, and the U.S., with its relatively strong economy, remains an attractive target.
Yet some analysts say Mizuho’s U.S. expansion may be ill-timed. European rivals like Barclays, Credit Suisse and Deutsche Bank are making cuts in the U.S. as part of significant reductions in their global investment banking operations.
Mizuho suffered a big setback in the U.S. the last time it attempted a major expansion. The lender lost more than 670 billion yen ($5.6 billion) from defaults on collateralized debt obligations in the 2008–’09 financial crisis. The bank had expanded its U.S. presence just before the crisis hit by hiring a New York–based team of structured finance bankers from Crédit Agricole.
Analysts say Mizuho will need to open its wallet further to grow significantly in the competitive U.S. market, but opportunities for other purchases like the RBS portfolio are limited.
“If they’ll want to further expand their U.S. business, they will need to make more acquisitions like that of the RBS operation,” says Takashi Miura, an analyst at Credit Suisse Group in Tokyo. “Their focus will be the troubled European banks and their noncore businesses in the U.S.”
Mizuho may also need more U.S. partnerships like its cooperation with Evercore Partners, the merger advisory firm founded and chaired by longtime dealmaker Roger Altman, analysts say. Mizuho and Evercore collaborate on cross-border mergers between Japanese and U.S. companies.
“Mizuho knows it’s a second-tier player in Wall Street, and they know it won’t be easy to compete with the first-tier players,” says Yoshinobu Yamada, an analyst at Deutsche Bank in Tokyo. “I think at this time an acquisition in investment banking is not likely. They will most likely take a step-by-step approach.”
For now, Mizuho is concentrating on staffing up to handle its growing U.S. fixed-income and equities businesses. Jennifer Powers, former head of debt capital markets at RBS, was named co-head of DCM at Mizuho in April. Derek Dillon, a former equity capital markets executive at Banc of America Securities, was named head of equity capital markets in December 2014.
In fixed income, the bank is focusing on originating investment-grade and high-yield bonds, collateralized loan obligations, asset-backed products and securitized assets. “We’re not jumping in with both feet into all products. It’s a very incremental growth strategy,” says Gerald Rizzieri, head of fixed-income and a former senior banker at Lehman Brothers and Barclays. “RBS has been a real catalyst for us. We expect that we will hold our position in the league tables and even improve it in the next year.”
The equity division plans to boost its staff by 25 percent, to at least 100 people, in the next six months, says Matthew DeSalvo, head of equity sales and trading for the Americas, who held a similar post at Credit Suisse from 2006 to 2012. The new staff will bolster the firm’s research, trading and distribution capabilities and help expand its Japan-centric equities business to U.S. and Asian securities, he added.
Mizuho aims to generate 33 percent of its net income from overseas customers in the financial year ending March 31, 2016, up from 24 percent three years earlier, driven mainly by growth in the U.S. and Asia.
“The Japanese are looking for more yield,” says Koudounis. “And if you look around the world, you see that Europe has issues, South America has issues, so the U.S. is, probably — as they say, ‘In the land of the blind, the man with one eye is king’ — the place to invest.”
