Barclays in Japan: Double impact

It may be common to trash one’s rivals in the world of banking, but even so, Asiamoney is surprised at the some of the comments it hears about Barclays’ Japanese business.

“They are generally regarded as a basket case. Is that what the story’s about?” one banker asks Asiamoney on a recent trip to Tokyo.

The UK-based firm, long a contender in Japan’s highly competitive investment banking landscape, appeared to take a step backwards at the beginning of 2016 when it cut its cash equities business across Asia, with the loss of more than 200 jobs. 

Although the decision was not driven by the Japanese business, that was where the axe fell hardest: roughly 120 of Barclays’ Japanese staff lost their jobs.

The basket-case jibe, made by a senior banker at a foreign bank in Tokyo, may seem unfair, but it is far from the only criticism levelled at the firm by others in Tokyo. 

One debt capital markets head says Barclays had become invisible in Japan; another says the firm offers little in the way of competition. Others claim they are unclear about Barclays’ strategy in Japan, or feel the cash equities cut undermines its wider business.

But perhaps these rivals have not been paying close enough attention. On a visit to Barclays’ office in Mori Tower, Kentaro Kiso, the relatively new president of Barclays Securities, and Tetsuya Kodama, chairman of both Barclays Securities and Barclays Bank Japan, tell Asiamoney about the limited impact the cash equities cut has had on their business, the main pillars of their strategy, and their determination to keep growing. 

The two men bring distinct strengths and experience to Barclays’ business in Japan. Kodama has an impressive Rolodex of Japanese contacts, acquired over the course of nearly four decades in the domestic market. 

He worked at Industrial Bank of Japan for almost 20 years, spent 12 years at Deutsche Bank in Tokyo, becoming head of DCM there, and moved to Barclays’ Japan operation in July 2012. His career has undeniably been successful; it has also undeniably been focused on Japan.

Kiso is the internationalist of the pair. He joined Barclays in 2004 as global head of medium-term notes, ran the European public-sector team between 2005 and 2013, and moved to Asia in 2013 to become head of fixed income syndicate across Asia Pacific. He only moved to Tokyo full-time in the middle of 2016, when he was picked to replace Eiji Nakai as president of Barclays Securities Japan.

Whereas Kodama is the relationship man, Kiso is the skilled manager with the global experience. One former employee says Kiso was quickly liked when he took over as president, adding that he was considered a better manager than his predecessor Nakai, in part because he was so personable. Nor does his experience running the wider fixed income syndicate business in Asia hurt his credentials when it comes to making Barclays Securities Japan a better fit in the global business.

The fact that Kiso and Kodama both share a debt background has made it easier for some competitors to find fault. 

The narrative from Barclays’ rivals in Japan is simple: the firm has ceded ground. The cash equities cut was followed by the closure of a wealth management tie-up with Sumitomo Mitsui Financial Group in January 2017. 

At Barclays Securities Japan, the banking and markets arm that represents the vast majority of the bank’s business and staff in the country, the headcount has fallen from 503 in March 2016 to 429 at the end of the most recent financial year in March 2017, while revenues fell 18% over the same period.

Barclays’ equity capital markets team had never gone for the top of the league tables in Japan, but then foreign firms do not have to. Its rivals point out that Barclays has effectively turned its back on a market that offers irregular but sizeable deals to foreign banks.

Japan Post Holding’s share offerings provide a good example. The government raised more than $5 billion from selling a stake in the national post office in October 2015, generating around $94 million of fees for a hefty bookrunner list that included Goldman Sachs, JPMorgan and Mitsubishi UFJ Morgan Stanley Securities, according to Dealogic. (Barclays was a co-lead manager on the $1.14 billion international tranche.) 

Two years later, Japan Post was back in the market with an even bigger deal, raising $11.6 billion. Flagship deals like Japan Post are few and far between, but the president of a rival foreign bank in Tokyo tells Asiamoney that without the occasional revenue boost from such large ECM transactions, it would be a struggle to sustain the rest of the business for long.

Kiso and Kodama, the two men charged with steering Barclays Securities Japan, are well prepared to meet such arguments head-on. They have clearly heard the nay-saying many times before and they reckon much of the doom and gloom stems from confusion.

“People misunderstand,” says Kiso. “They think that we are out of cash equity, so that’s a precursor for an entire withdrawal from Japan. That’s just not true.”

One market where this appears evident is – ironically – equities. Barclays says that according to data it received from the Tokyo Stock Exchange, it was ranked second in cash products trading overall in October and number one for co-location trading, when banks place their servers alongside the exchange’s to ensure speedy execution, typically for high frequency traders. This is hardly the result one would expect after a pull back. (Asiamoney asked the stock exchange to verify these numbers, but it declined our request.)

The bank still receives a large revenue stream from its equity financing and derivatives business in Tokyo. Indeed, Kiso still sees equities as crucial.

“It is one of the three or four pillars for the entire business,” he says. “If you ask me about the combination of equity derivatives and equity financing, it is easily a quarter of our revenues.”

The equities business generates two-way traffic. Barclays Securities traders can cater to European and US investors coming into the Japanese market, but the firm’s sales staff is also able to drum up demand from Japanese clients looking to go overseas. 

The P&L for the latter is booked to Europe or the US, depending on where the firm’s Japanese clients are investing, but it is clear that a decent presence on the ground in Japan is helping the global business. 

Barclays has not, then, withdrawn entirely from Japanese equities. It processes electronic orders and has a thriving equities derivatives business. But the firm has stepped back from the high-touch cash equities broking business that relies on a large team of relationship managers to keep the volumes up.

Considering the performance of Japan’s stock market in 2017, up nearly 20% in the first 11 months, Barclays’ decision to pull out of cash equities appears a mis-step – or at the very least poorly timed – and has given rivals plenty to gloat over.

“If there was one business they should have kept, it was the cash equities business,” says a Japanese banker at a US firm. 

Kodama disagrees. He admits that the decision to exit cash equities across Asia was hotly debated, but makes clear that he trusts the decision to pull out, one of the earliest salvos in a bank-wide review Jes Staley launched after he took over as Barclays’ chief executive in December 2015. 

Asiamoney points out that Japan’s stock market has been on a tear, boosting trading revenues for banks and securities firms that have been hit hard by a slowdown in fixed income trading. But Kodama is resolute that the bank’s strategy should not be determined by short-term fluctuations in the stock market. 

“Today, it looks great,” says Kodama. “But if you look at it on a 10-year horizon, I’m not so sure. Everybody is entitled to their decisions. In this new tight regulatory environment, when the cost of capital is extremely high, we decided that we wanted to stick to what we are good at.” 

So, what is Barclays good at? Kiso describes a business that is built on multiple pillars. The markets team drives much of Barclays’ profit from Japan, underpinned by a fixed income, currencies and commodities trading business and including the money Barclays makes acting as a primary dealer of Japanese government bonds. But the firm’s recent hires have been in banking, which combines DCM, corporate derivatives and M&A. 

It is a world that both Kiso and Kodama know well. 

Kiso, an MTN specialist at Barclays, and Kodama, who was head of DCM at Deutsche Bank, both have the debt markets in their blood. That experience clearly helps another of the bank’s core pillars: one of Japan’s agency issuers told Asiamoney that Barclays was one of two banks it trusts most to manage its offshore issuance. 

Indeed, even its competitors cannot deny Barclays’ strengths when it comes to Japan’s agency issuers.

“They’re almost a boutique investment bank in Japan,” says one rival banker. “They’re not strong in the domestic market but in the international market, for SSAs [sovereign, supranational and agency issuers], they’re one of the very strongest.”

Barclays worked on around $45.8 billion of bonds from Japanese issuers in 2016, and had closed $34 billion of deals by late November 2017, according to Dealogic. That was enough to make it a top 10 bookrunner across all currencies, including domestic yen deals in 2017. 

Reduce the league table just to dollar bonds from Japanese issuers and Barclays moves up to seventh place.

Since the beginning of 2016, Barclays has worked on eight dollar-denominated bonds for Toyota Motor Credit Corp, ranging from small private placements to large public deals; five $1 billion-plus bonds for Sumitomo Mitsui Financial Group; and four bonds for Japan Bank for International Cooperation (JBIC), worth a combined $10 billion.

This points to the firm’s strategy across Barclays Securities, namely catering to the same clients again and again. The bank wants to be among the top three banks in terms of wallet share for each of its clients, something that Kiso admits requires a relentless focus.

“We have some of those positions already, so we know the formula to get there,” he says. “We just need to expand the client reach.”

Part of the way the firm is doing that is strengthening its advisory capacity. The bank hired a head of Japan mergers and acquisitions in December 2016. Yuzo Otsuka, a Lazard Freres executive who had previously been head of investment banking for UBS in Japan, joined Barclays in December 2016. A few months before that, it plucked Citi’s former Japan M&A head Takeshi Inoue to run its financial institutions group. 

These hires, as well as others at more junior levels, have helped make up for some of those who left the firm in the wake of the cash equities cull. Barclays employs around 500 people in Japan, well over 80% of them at Barclays Securities.

“We have made targeted hires around M&A, FIG and structured sales,” says Kiso. “We strategically looked into these hires and, meanwhile, attrition happened, so the numbers stayed steady.”

Barclays is already having success bolstering its M&A revenues from Japan, a natural step, given the hunger from the country’s corporations to escape their domestic market. 

It advised Asahi on its $7.76 billion acquisition of Anheuser-Busch InBev’s eastern European assets in December 2016 and got on the sell side for Nissan’s $1 billion sale of its battery business to GSR Capital this year.

DCM and M&A are two key areas in Barclays’ banking business where it sees signs of growth. The other is offering derivatives to corporate clients looking to hedge interest rate or currency risk and companies looking for more complex transactions.

Between these three areas, Barclays has defined a theme for its 38 Tokyo-based banking employees to chase: Japanese companies moving offshore. It wants to be there to advise those companies on acquisitions, help them find funding in the public and private markets, and offer a range of derivative hedging tools to soothe any nerves. 

This is a smart strategy. But will it be enough to prove Barclays’ critics wrong?

Part of the problem in deciphering Barclays’ Japanese business is getting a grip on the numbers. The bank does release figures for its Japanese securities arm, although not in English, but there is reason to think the public numbers tell an overly pessimistic story.

According to its most recent filing, Barclays Securities Japan made a loss of ¥8.74 billion ($77 million) in the year ending March 31, 2017, only a slight deterioration from the year before. But its revenues fell to ¥39.43 billion, down around 18% from the previous financial year.

It comes as little surprise that revenues have fallen after the bank pulled out of a big business area in Japan. But according to Kiso and Kodama, there is also plenty missing from these numbers.

The UK bank uses the Tokyo business as just one cog in a wider operation, allowing it to bring Japanese investors to its global clients as well as bringing its global clients to Japan. That does not always lead to a revenue boost for Barclays Japan, despite the work and relationships on the ground.

Take the example of JBIC, an export credit agency with which Kodama has a long-standing client-banker relationship, according to those in the market. 

When JBIC tapped the market with a $4.5 billion multi-tranche bond in November 2017, the deal paid around $6 million in fees, according to Dealogic, making it a nice earner for Barclays and the three other bookrunners on the transaction. But that profit was booked in London, not Japan.

The logic is obvious; this was a global transaction with syndication largely carried out by debt bankers in the City even though Kodama played a vital role in winning the business.

What is the value of such a relationship? This question of intangible benefits is the same one facing many other foreign banks in the market. 

Most foreign investment banks operating in Japan are largely reliant on generating offshore revenues, the bread-and-butter business being bringing Japanese banks and corporations to the overseas bond markets. 

Kiso says Barclays Securities wants to become profitable on a stand-alone basis – when ignoring these hard-to-quantify benefits to the global business –but admits that’s difficult for a bank without a strong presence in the domestic market.

“That is our goal, and we definitely want to aim for that in the near future,” he says. “But there are not many around [that can do that]. It only happens in a year where you have a big deal, like Japan Post. The rest of the year is either breakeven or a loss.”

Several veteran debt bankers in Tokyo tell Asiamoney they have not met Kiso, a surprising admission given the close-knit nature of the market. But Kodama, who is well known and widely respected by his local rivals, is effusive about his colleague. As Kiso leaves the room for a mid-afternoon meeting, Kodama stays with Asiamoney for almost another hour – and quickly makes clear how impressed he is by a man he describes as “too modest”.

“He would not say it so I have to say it for him: he did a lot of hard work in making sure [we’ve] got on the right track,” says Kodama. “We feel much more comfortable now.”

Kodama strikes an optimistic note about Barclays Japan’s prospects in the coming years when we ask him how much investment banking wallet share Barclays will be able to get in Japan.

According to figures shown to Asiamoney by a rival bank, Barclays Japan had only 1.3% of the available revenue pool in the financial year ended March 31, 2017, compared with 3.9% for Goldman Sachs and 3.4% for JPMorgan. 

Kodama is realistic about the chances of any foreign firm supplanting Daiwa Securities, SMBC Nikko, Mizuho, Nomura and the thriving tie-up between Mitsubishi UFJ and Morgan Stanley.

“The five of them will have a big, big chunk, so the foreign firms will be limited to around 20% to 25%,” between them, he says. 

His target? To grab around a quarter of this, or around 5% of the overall wallet share, although he does admit this number is unofficial. 

It is an ambitious target, something Kodama readily admits. But it is hard for Asiamoney to avoid the feeling that the combination of Kiso and Kodama will be strong enough to bring Barclays at least part of the way there.

In the long run, the success of Barclays Securities Japan will depend on the bank marrying Kiso’s global experience with Kodama’s local savvy and exhaustive list of contacts. 

That strategy might not get a ringing endorsement from the bank’s rivals, but it fits well with Barclays’ plan to help Japanese corporations pull off an increasingly urgent move overseas.

“Do we have ambitions to take over banking from the American houses here? No,” says Kodama. “But we do want to play to our strengths, and our strength is the global franchise.”