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1、WHATS NEXT FOR JAPANESE MEGABANKS?Dylan WalshJasper YipAngelina OgumaJulian AdlerVarun VishnubhatlaWhy read this paper?The Japanese banking industry is among the largest in the world,but equity investors do not value Japanese megabanks like global leaders in the industry.The valuation gap to global

2、peers is 70%today.We believe this valuation gap will remain stubbornly wide unless the megabanks take action to address investor concerns.The old news is that the organizational and operational complexity of the domestic megabank model is a major concern for investors this will take time to address

3、and may never be fully resolved.What is new in our study is that investors see more immediate opportunities for the megabanks to close the valuation gap.Japanese banks have a generational opportunity to build a wealth management franchise that generates returns now common in other markets,delivering

4、 150%in price-to-book improvement.Investors also see significant untapped value in a pan-Asian banking platform that can capture local growth opportunities and extract synergies from regional operations,potentially delivering 115%in price-to-book improvement.Each opportunity presents a path to break

5、 through the critical 1x price-to-book threshold the Tokyo Stock Exchange demands.This is a critical moment for Japanese banks.All eyes are turning toward Japan and Japanese banks will need to move quickly to capture the opportunity that everyone sees.CONTENTSExecutive Summary 4A Moment of Opportuni

6、ty 6A Moment of Challenge 8Seizing the Moment 14Strategy 1:Address organizational and operational inefficiencies 14Strategy 2:Develop client-oriented wealth business 15Strategy 3:Establish a pan-Asian banking powerhouse 20 Oliver Wyman4Whats Next for Japanese Megabanks?EXECUTIVE SUMMARY1 Yuasa,K.(20

7、23,January 26).Tokyo Stock Exchange plans ultimatum:Shape up by 2026 or delist.Nikkei Asia.2 MostrecentpublishedfinancialsusedforJapanesebanks(JFY 2023).3 CalculatedusingthemegabankaverageforJFY2023(April2022-March 2023)and estimated maximum improvements based on Oliver Wyman analysis.Japanese megab

8、anks are enjoying a rare moment in the sun.Economic tailwinds have boosted returns and replenished capital buffers,giving these institutions more room to maneuver and the opportunity to pursue substantive strategic moves.However,investor skepticism of the“megabank miracle”remains.Despite a strong ra

9、lly over the past 18 months,shares still trade at a significant discount to North American peers and do not meet targets set by the Tokyo Stock Exchange(TSE)for all listed companies to maintain 1x price to book ratio(P/B).1,2Global investors will need to see more evidence of structural change to re-

10、rate share prices.Japanese megabanks can learn from the experience of their peers in North America and Europe,which have optimized their capital,and structured business models and clear investor narratives around activities that command higher valuation multiples.The specific path(s)the megabanks fo

11、llow will be different,but the playbook should be the same.Japanese megabanks will be expected to take action in the following three areas.Reduce complexity and inefficiencies in the operating model:Japanese megabanks have fragmented governance and sprawling legal entity structures that global inves

12、tors struggle to analyze.For years,the megabanks have been exploring potential governance and structural simplification.To some extent,these structures are features of Japans legal,regulatory,and business environment.However,the current economic tailwinds provide an opportunity to convince investors

13、 that the megabanks can overcome this complexity to deliver stronger returns over an extended time horizon.Investors will focus on outcomes(e.g.,profitability and returns),but a clear narrative on how the operating model is evolving to reduce complexity,control risks,and improve efficiency will show

14、 the way.Build credible strategies in activities that investors reward:Investors tend to reward stable,profitable businesses supported by sustained economic tailwinds(e.g.,wealth management,transaction banking).The domestic wealth and asset management opportunity in Japan fits the profile,but the bu

15、siness model will need to evolve to capture its full potential.The recent transformation of the US wealth management industry offers a playbook for Japanese megabanks that we believe can deliver 150%3 price-to-book improvement.Oliver Wyman5Whats Next for Japanese Megabanks?Leverage domestic scale on

16、 the global stage:Japanese megabanks are better positioned to take share and generate attractive returns outside Japan,driven in part by the strength of their domestic franchises(e.g.,sticky customer deposits,flexible capital position).However,building a successful economic model will demand more fo

17、cused strategies with greater integration of international operating models and infrastructure.We believe that successful execution can potentially deliver 115%4 in price-to-book improvements.Replicating the complexity of the domestic banking model in Japan will erode the fleeting advantage that meg

18、abanks have abroad.Failure to capitalize on this moment may keep the megabanks locked in a valuation trap.On the current path,analyst consensus today is for Japanese megabanks to continue trading at a significant discount to their North American peers and remain below the 1x P/B target set by the TS

19、E.The greater risk is competition from international competitors,at home and abroad.The Japanese domestic market(and many of the international markets where Japanese megabanks have built market share in recent years)are increasingly attractive to international competitors.Time is of the essence for

20、Japanese megabanks,as the window of opportunity to break out of the valuation trap may soon close.4 CalculatedusingthemegabankaverageforJFY2023(April2022-March 2023)and estimated maximum improvements based on Oliver Wyman analysis.Oliver Wyman6Whats Next for Japanese Megabanks?A MOMENT OF OPPORTUNIT

21、YJapanese banks have become a focal point of global investor attention after decades in the shadows.The triumvirate of Sumitomo Mitsui Financial Group(SMFG),Mitsubishi UFJ Financial Group(MUFG),and Mizuho Financial Group(MHFG)posted encouraging earnings in 2023.And investor sentiment on the market h

22、as improved,as recent policy rate hikes by the US Federal Reserve and other central banks have propelled share prices to outperform not only the Nikkei but also North American and European peers.Total shareholder return(TSR)has followed a similar trend:Japanese banks increased TSR by 151%versus Euro

23、pean(68%)and North American(30%)banks over the same period.Exhibit 1:Investor sentiment and bank stock prices1 post-COVID150100500-50%change since Feb.2020Jan.2020Jul.2024 Jan.2023 Jul.2023 Jan.2024 Jul.2022 Jan.2022 Jul.2021 Jan.2021Jul.2020129%65%51%18%Japanese2 banksNorth American3 banksEU4 banks

24、Nikkei1.CalculatedusingstockpricesdenominatedinlocalcurrenciesandbyaveragingchangesinceFebruary2020forselect banks.2.MitsubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).3.JPMorganChase(JPM),BankofAmerica(BAC),Citigroup(C),RoyalBankofCanada(RBC).4.Santander

25、(SAN),BNP Paribas(BNP),Deutsche Bank(DB),Barclays(BARC).Source:LSEG Datastream Oliver Wyman7Whats Next for Japanese Megabanks?The optimism in Japanese banking is largely a result of shifting macro conditions.The big driver of recent performance has been rising interest rates overseas,allowing for 30

26、%growth in average net interest income(NII)across the megabanks since Japanese fiscal year(JFY)2019.These institutions all enjoy a funding cost advantage in their domestic operations,which they have deployed aggressively in international markets to capture wide margins and boost earnings.Meanwhile,m

27、acro conditions in the domestic market have shifted in ways that will support improving economics at home.The Bank of Japan(BOJ)announced in March that it would reverse course from its long-standing negative/zero interest rate policy(NIRP/ZIRP),and the bull market has boosted capital markets activit

28、y in Japan.All of this has provided Japanese banks with greater flexibility to pursue their strategic priorities.Exhibit 2:Japanese megabanks NII versus major policy ratesJFY 2017 TrillionJFY 2018JFY 2019JFY 2020JFY 2021JFY 2022JFY 20231JFY 20242(Consensus)-0.05%-0.06%-0.05%-0.04%-0.02%-0.03%-0.03%0

29、-0.10%Target0-0.1-1%0%6%5%4%3%2%1%1.81.71.61.51.41.92.0US federal funds rate(right axis)EU deposit facility rate(right axis)BOJ policy rate(right axis)Average megabanks NII(left axis)End of BOJNIRP/ZIRP5.25-5.50%(target)3.75%1.JapanesefiscalyearspansApriltoMarch(example,April2022-March2023isJFY 2023

30、).2.Policyratesfor2024showthemidpointofthelatesttargetrangeforUSandJapanandthelatestECBpolicyrate(3.75%asof12June 2024).Source:VisibleAlpha(consensusestimatesasofJune2024),LSEGDatastream,andcentralbank websites Oliver Wyman8Whats Next for Japanese Megabanks?A MOMENT OF CHALLENGESo,have Japanese bank

31、s truly turned the corner or is this simply a moment in the sun?Investors will be keen to see if Japanese megabanks can sustain the recent momentum and address both historic and new challenges.Skepticism on their returns lingers from the past decade,affecting valuations,while the interest rate envir

32、onment presents new challenges.RETURNS CONCERNSDespite the recent stock rally,investors have been asking how megabanks plan to improve returns sustainably over future cycles.On a return on tangible common shareholder equity(ROTCE)basis,Japanese megabanks have lagged North American and European peers

33、,struggling to take advantage of their scale to generate attractive returns for shareholders.These gaps are projected to narrow over the next three years,but not materially enough to change the story.Exhibit 3:Return on tangible common shareholder equity(ROTCE)JFY 201916.5%6.1%4.8%16.7%5.4%3.3%12.1%

34、5.3%-0.5%19.0%9.5%6.6%15.1%10.7%6.9%14.3%10.2%7.9%13.8%10.0%7.8%13.8%10.9%8.1%JFY 2020JFY 2021JFY 2022JFY 20231JFY 2024(Consensus)JFY 2025(Consensus)JFY 2026(Consensus)0%-2%16%14%12%10%8%6%4%2%18%20%Japanese banks2North American banks3EU banks41.JFY2023referstoApril2022March2023forJapanesebanks,Nove

35、mber2021October2022forRBC,andJanuary2022December2022foret al.2.MitsubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).3.JPMorganChase(JPM),BankofAmerica(BAC),Citigroup(C),RoyalBankofCanada(RBC).4.Santander(SAN),BNP Paribas(BNP),Deutsche Bank(DB),Barclays(BARC

36、).Source:VisibleAlpha(consensusestimatesasofJune 2024)Oliver Wyman9Whats Next for Japanese Megabanks?Low returns have impacted megabanks valuations,which remain below those of US peers.While expected to trend up over the next few years,megabanks are expected to remain well below 10%ROTCE and at leas

37、t 250 bps behind European peers and 500 bps behind North American peers.5 Investors forecast improvement in JFY 2026 with a range of 0.71.1x price to tangible book value(P/TBV)but only expect one of the three megabanks(MUFG)to surpass the 1x P/TBV threshold.See Exhibit 4.A tempting lever to increase

38、 shareholder returns is through dividends and share buybacks,but megabanks payout ratios are already in line with peers.While further increases may boost share prices in the short term,they fail to address investor concerns about sustained profitability.See Exhibit 5.In addition to investors,the TSE

39、 recently announced a directive calling on listed companies with a P/B ratio6 of less than 1x to articulate plans to improve their valuations or risk being demoted or even delisted.Though the actual likelihood of a megabank delisting is low,the directive serves as a stark reminder that banks are not

40、 yet out of the woods.To enforce this initiative,the TSE has begun a monthly publication of firms adequately disclosing capital efficiency plans,thereby indirectly drawing public attention to those that have not yet done so.7The call for higher P/B ratios was the latest in a line of actions the TSE

41、has taken to raise standards for listed companies.In 2021,the TSE announced a revision to its Corporate Governance Code(CGC)that asked companies to increase independence,diversity,and sustainability measures,or explain their non-compliance.5 Athree-factorDuPontanalysisofJapanesemegabanksrevealsthatl

42、owerROEsareprimarilydrivenbyacostlyassetbase.MegabanksarealsomorehighlyleveredthantheirAmericanandEuropeanpeerswithanasset/equityratioofapproximately 25x.6 TheTSEcalledfor1xP/B,butthispaperwillgenerallyexamineP/TBVespeciallyinrelationto ROTCE.7 Bridge,A.(2024,January15).Explainer:WhatistheTokyoExcha

43、ngesnewlistoffirmsdisclosingcapitalefficiencyplans?Reuters.Oliver Wyman10Whats Next for Japanese Megabanks?Exhibit 4:ROTCE and P/TBVJFY 20231&FY 20232JFY 20263&FY 202542023-2025ROTCEP/TBVROTCEP/TBVTrendMitsubishi UFJ Financial Group(MUFG)7.080.649.121.08Sumitomo Mitsui Financial Group(SMFG)7.010.617

44、.350.80Mizuho Financial Group(MHFG)6.520.557.850.75JP Morgan Chase(JPM)20.761.9816.661.86Bank of America(BAC)13.461.3813.231.33Citigroup(C)4.900.607.830.65Santander(SAN)15.170.7914.600.85BNP Paribas(BNP)8.990.7110.440.67Deutsche Bank(DB)7.440.448.510.51Barclays(BARC)9.000.4710.180.50Hong Kong and Sh

45、anghai Banking Corporation(HSBC)15.660.9913.300.870%7%8%9%10%11%ROTCE12%13%15%16%17%0.201.81.61.41.21.00.80.60.42.0Japanese banks5 (JFY 20263)North American banks6(FY 20254)EU banks7(FY 20254)DBCBNPBARCHSBCBACJPMSANMUFGSMFGMHFG14%P/TBV 1.JFY2023spansApril2022March 2023.2.FY2023spansJanuary2023-Decem

46、ber 2023.3.JFY2026(consensus)spansApril2025March 2026.4.FY2025(consensus)spansJanuary2025December 2025.5.MitsubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).6.JPMorganChase(JPM),BankofAmerica(BAC),Citigroup(C).7.Santander(SAN),BNPParibas(BNP),DeutscheBank(

47、DB),Barclays(BARC),HongKongandShanghaiBankingCorporation(HSBC).Source:VisibleAlpha(consensusestimatesasofJune 2024)Oliver Wyman11Whats Next for Japanese Megabanks?Exhibit 5:Redistributions to shareholders27.4%9.5%1.5%4.5%4.6%1.1%5.3%6.5%4.9%6.3%5.2%7.1%JFY 2020JFY 2021JFY 2022JFY 20231Japanese banks

48、3North American banks4EU banks51.JFY2023referstoApril2022March2023forJapanesebanks,November2021October2022forRBC,andJanuary2022December2022foret al.2.Including common dividends and buybacks(calculated using dividends per share,change in shares outstanding,andFYendstockpriceinlocal currencies).3.Mits

49、ubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).4.JPMorganChase(JPM),BankofAmerica(BAC),Citigroup(C),RoyalBankofCanada(RBC).5.Santander(SAN),BNPParibas(BNP),DeutscheBank(DB),Barclays(BARC).Source:LSEGDatastream,VisibleAlpha,andOliver Wyman analysis INTERES

50、T RATE MANAGEMENT CONCERNSFor Japanese banking executives,this is the first time in a generation that they need to manage a dynamic interest rate environment both domestically and abroad.While rate changes have yielded key benefits(e.g.,international NII expansion),the associated risks need to be cl

51、osely managed,given the sensitivity of the balance sheet and loan book to rate movements.International banks have already been pushed to“relearn”interest rate risk management after decades of relatively low and stable rates,and Japanese megabanks will need to follow suit in adopting best practices t

52、o stabilize NII and protect their capital base.One implication of rising rates on Japanese megabanks balance sheets is the accumulation of unrealized losses.As of JFY 2023(calendar year April 2022March 2023),unrealized losses on foreign bonds amounted to 7.4%of common equity tier 1(CET1)capital.Betw

53、een 2022 and 2023,unrealized losses on domestic bonds increased by 0.25%to total 0.8%of CET1 capital.These losses will continue to accumulate if international rates remain high and domestic rates rise.Oliver Wyman12Whats Next for Japanese Megabanks?Unrealized losses can have significant consequences

54、,which have already been felt by Norinchukin unrealized losses in additional other comprehensive income(AOCI)8 surpassed US$11 billion(JP 1.79 trillion),which triggered a decision to raise US$7.7 billion(JP 1.2 trillion)to offset a 29%decline in CET1 capital.9Exhibit 6:Japanese megabanks unrealized

55、gains/losses2,386422046JFY 2017JFY 2018JFY 2019JFY 2020JFY 2021JFY 2022JFY 20231%CET1 capital Domestic bondsForeign bonds1.JapanesefiscalyearspansApriltoMarch(example,April2022March2023isJFY 2023).2.Calculatedusingunrealizedgains/lossesondomesticandforeignbonds;notrepresentativeoftotalreportedunreal

56、ized gains/losses.3.Calculatedusingtheaggregatevalueofthe megabanks.Source:DatabooksforMHFG,SMFG,andMUFG;FinancialResultsSupplementaryInformationreportsforSMFG(JGAAP)Increases in the JPY/USD swap rate have also begun to carve into the realizable NII of Japanese megabanks.Since JFY 2019,yen-denominat

57、ed deposits are up 20%while domestic loan activity has only expanded by 9%.This surplus of cheap deposits provides a funding advantage,but low domestic loan growth has focused attention on lending opportunities outside of Japan.A scenario in which domestic Japanese rates remain suppressed while rate

58、s abroad rise could lead to pricier swaps,making it difficult to fund these businesses and remain competitive abroad.8 AOCIislargelycomprisedofabanksincome/lossesfrom securities.9 Walker,J.(2024,May30).Norinchukinspaperlossesdoubletorecordhigh.R.Oliver Wyman13Whats Next for Japanese Megabanks?Exhibi

59、t 7:Domestic loans and deposits(average of three megabanks)%change from JFY 2019%Domestic loans2(left axis)Domestic deposits(left axis)50101520250.00-0.100.050.100.150.20JFY 2019JFY 2020JFY 2021JFY 2022JFY 20241,3(Data not available)JFY 2023JPY:USD 1-year swap rate(right axis)0.18%20%growth9%growth1

60、.JapanesefiscalyearspansApriltoMarch(example,April2023March2024isJFY2024).JFY2024isnotavailablefor Japan.2.DomesticloansforMUFGincludescommercialdomestic,residential,card,andotherline items.3.Swapratesattheendoftheperiodare displayed.Source:20-FreportsforMHFG,SMFG,and MUFG Japanese banks are also su

61、sceptible to declines in international interest rates.Since 2009,the proportion of NII earned by Japanese banks from their international business has increased by more than 30 percentage points.In a scenario where US/EU rates decline more rapidly than domestic rates rise,banks are at risk of a squee

62、ze on earnings.Exhibit 8:Share of net interest income(NII)2InternationalDomesticJFY 20093JFY 20133-JFY 2020JFY 2021-JFY 2023184%16%68%32%53%47%1.JapanesefiscalyearspansApriltoMarch(example,April2022March2023isJFY 2023).2.SharescalculatedusingtheaverageofNIIacrossallthreeJapanesemegabanks.Dataisdrawn

63、fromnon-consolidatedreporting,somaynotequalNIInumbersfoundinconsolidatedreportingfromMHFG,SMFG,and MUFG.3.MHFGdataisnotavailablebefore2013,soforyearsbefore2013datasharestheaggregateofNIIacrossSMFGand MUFG.Source:DatabooksforMHFG,SMFG,and MUFG Oliver Wyman14Whats Next for Japanese Megabanks?SEIZING T

64、HE MOMENTInvestor perceptions are driven by many factors,but perspectives from current and former equity analysts suggests there are a few broad actions megabanks can take to better articulate a compelling equity story:(1)addressing organizational and operational inefficiencies,(2)growing stable and

65、 well-valued businesses such as wealth management franchises,and(3)delivering a differentiated international strategy and operating model.These strategies in tandem will allow banks to navigate the external landscape while also answering the question of how they seek to sustainably grow.Strategy 1AD

66、DRESS ORGANIZATIONAL AND OPERATIONAL INEFFICIENCIESMaking foundational improvements to address organizational and operational deficiencies is key to convincing investors of megabanks ability to close the returns gap with global peers.Across all three megabanks,there are universally applicable enhanc

67、ements that would help move the dial for investors.Active resource managementAs financial resources have become more expensive under new global and domestic capital regulations,international banks have built frameworks to measure and manage resource deployment across businesses,geographies,and clien

68、ts.This has been a persistent challenge for Japanese banks,complicated by siloed organizational structures and financial data across these banks.Adopting a more consistent measure of capital(and return on capital)would allow for more efficient deployment of resources to high-return activities and mo

69、re transparent communication with investors on the strategy the megabanks are pursuing to boost returns.GovernanceFragmentation between the trust,securities,and banking businesses(and across legal entities)has generally limited Japanese banks ability to operate as efficiently as their global peers i

70、n international markets,and to some extent domestically.Taking steps to integrate and modernize governance structures will help unlock value,limit trapped resources,and signal better coordinated decision-making to investors.Oliver Wyman15Whats Next for Japanese Megabanks?Support model10UBSMediaRelea

71、ses.(2021,August10).display-page.Global.Technology and platform enhancements are critical to supporting future growth ambitions.These programs take several years to deliver successfully,and megabanks have tended to focus on quick fixes as incentivized by short executive tenures.Technology is especia

72、lly important for Japanese banks to continuously monitor risks and potential opportunities.Integrating and re-platforming technology could position megabanks to achieve full benefits.Coverage and employment modelHuman resources is a critical component to drive product cross-selling while also buildi

73、ng brand recognition and unity.Peer practices have shown that operating as“one team”can improve client visibility into the full product suite and promote revenue cooperation through cost efficiency.These areas are foundational to improving the perception of Japanese banks in investors eyes,and impro

74、vements will serve as building blocks to execute on more substantive strategic initiatives.A decisive shift in operating practices is necessary to break out of the valuation trap,and the window to act has finally opened.Failure to capitalize may result in continued mediocre assessments of megabanks

75、reminiscent of the past two decades.Strategy 2DEVELOP CLIENT-ORIENTED WEALTH BUSINESSInvestors tend to value firms that excel in a few select business lines as opposed to acting as a“jack-of-all-trades”,and investors have a particularly positive outlook on firms with a clear wealth and asset managem

76、ent focus given their predictable and stable earnings profile(see Exhibit 9).Wealth franchises have been historically difficult to build in Japan,prompting megabanks and large financial groups to pursue partnerships with market leaders to expand their services(e.g.,MUFG with Morgan Stanley and SuMi

77、Trust with UBS).Thus far,these partnerships have had a targeted audience in mind,articulated by UBS SuMi as“high net worth and ultra-high net worth clients.”10 However,as the deflationary environment winds down and supportive policy plans are implemented,building an organic wealth model catered towa

78、rd a broader base of clients is more viable than ever.If Japanese megabanks enhance their wealth management franchises,they could earn a valuation boost.Achieving even the partial success of peers,we estimate Japanese megabanks could see ROTCE climb to the 913%range,and command P/TBV ratios of 1.21.

79、5x.Oliver Wyman16Whats Next for Japanese Megabanks?Exhibit 9:Closing the wealth gap0%2%4%6%ROTCE8%10%12%14%16%18%20%22%0.201.81.61.41.21.00.80.60.42.02.22.4Megabank average consensus5Global universal banks7(FY 2023)1Japanese banks5(JFY 2023)2Wealth management6(FY 2023)1MSJPMSTTRBCUBSBACHSBCBARCImpro

80、vements assume 25-45%of revenues are from wealth and megabanks are rewarded half as well as successful peers:ROTCE:8.9 12.8%P/TBV:1.2 1.5xBNPDBCSANJFY 20243JFY 20232JFY 20264P/TBV1.FY2023spansJanuary2023December2023exceptRBCwhereFY2023spansNovember2022October 2023 and UBS spans January 2022December

81、2022.2.JFY2023spansApril2022March 2023.3.JFY2024(consensus)spansApril2023March 2024.4.JFY2026(consensus)spansApril2025March 2026.5.MitsubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).6.MorganStanley(MS),StateStreet(STT),RoyalBankofCanada(RBC),andUnionBanko

82、fSwitzerland(UBS).7.JPMorganChase(JPM),BankofAmerica(BAC),Citigroup(C),Santander(SAN),BNPParibas(BNP),DeutscheBank(DB),Barclays(BARC),HongKong and Shanghai Banking Corporation(HSBC).Source:VisibleAlpha(consensusestimatesasofJune2024)andOliver Wyman analysis Oliver Wyman17Whats Next for Japanese Mega

83、banks?Previous efforts to grow wealth have not been enough to move the needle on investor valuations.Rather than what is being offered,how Japanese megabanks are pursuing wealth management may be holding back valuations,and there are lessons to be learned from successful peers.Megabanks to date have

84、 focused primarily on developing and marketing sleek wealth management products.Successful market peers,on the other hand,have developed a rigorous foundational understanding of their client segments,and oriented their business model and structure around how they can best serve prospective customers

85、.This is especially pertinent when attempting to capture sophisticated clients with different needs from traditional retail customers.For example,wealth clients tend to value accessibility to a“one-stop shop”capable of offering the full suite of wealth management products through a single point of c

86、ontact.Leading firms have optimized this model to make the client experience as seamless as possible(example,through tenured,lifelong relationship managers).This in turn has allowed them to offer more products and services to more clients via cross-sales.To date,megabanks have struggled to replicate

87、 this model.And while the product suites may be similar,they are provided by different pillars in the three-legged organizational structure(banking,securities,trust),and are dependent on maintaining multiple points of contact.Without prioritizing client-oriented considerations,further investment int

88、o expanding product offerings will have limited appeal.This approach has notably not translated into successful client acquisition compared to peers.For example,despite having similar product offerings,SMFG experienced only a 4%annualized growth rate in customers using wealth management products bet

89、ween JFY 2021 and JFY 2023,whereas MS achieved an 11%annualized growth rate in customers using self-directed or stock plan products between 2020 and 2022.See Exhibit 10.Separately,Japanese megabanks can consider alternative revenue models to enhance the profitability of their wealth management franc

90、hise(e.g.,transitioning away from commission-based fee structures).As of December 2022,agency commissions dominate the investment management fee structure in Japan,representing roughly half of fees charged on both passive and active funds.11 This is not dissimilar to Morgan Stanleys fee structure ov

91、er a decade ago in 2011.Since then,transaction-based revenue has declined while asset management(advisory fees charged as a percentage of AUM balances)and interest income have increased.This has led to a notable increase in returns.See Exhibit 11 and Exhibit 12.11FinancialServicesAgency.FinancialSer

92、vicesAgency.(2023).ProgressReport2023forEnhancingAssetManagementBusinessinJapanRecommendationsforimprovingtrustand transparency.Oliver Wyman18Whats Next for Japanese Megabanks?Exhibit 10:Customers using WM productsCustomers(Millions)Customers using WM products(SMFG)WM customers using self-directed o

93、r stock plan products(MS)204681012141618JFY 2019JFY 2020JFY 20211JFY 2022JFY 20232SMFG:4%MS:12%SMFG:3%MS:10%1.IncreaseinMorganStanley(MS)customersbetweenJFY2020andJFY2021islargelydrivenbytheacquisitionof E*Trade.2.JapanesefiscalyearspansApriltoMarch(example,April2022March2023isJFY2023).MSisalignedto

94、the FY withthemostoverlap(example,JFY2023correspondstoJanuary2022toDecember 2022).Source:2023annualreportforSMFG;10Kreportsfor MSWhat has worked for global leaders in wealth management provides a useful guide for how Japanese megabanks can develop a strategic tilt to win over investors.Shifting to a

95、 client-centric,integrated,and fee-based model may develop wealth management into a profitable,scalable offering.If the megabanks do not build their wealth management franchises,international competitors may mobilize quickly to take advantage of the opportunity.As of 2023,the Japanese government pub

96、licly welcomed foreign banks to participate in its US$5 trillion asset management industry an open invitation for global banks with more mature wealth and asset management businesses to expand into Japan.1212Yamazaki,M.(2023,September21).JapansKishidaseekstoshakeupto$5trillionassetmanagementindustry

97、.Reuters.Oliver Wyman19Whats Next for Japanese Megabanks?Exhibit 11:Morgan Stanleys wealth management revenue by component and RoEAsset management/distribution/admin feesOther revenueTransactionalInterest and dividends,netROE(right axis)2,0004,0006,0008,00010,00012,00014,00016,00018,00020,00022,0002

98、4,00026,00028,000Revenue($Million)20112016202020230%02%4%6%8%10%12%14%16%18%Source:AutonomousExhibit 12:Share of total net revenues2011201620202023TrendROE9%14%13%17%Other revenue3%2%2%2%Interest and dividends,net11%23%21%31%Transactional35%20%19%14%Asset management/distrib/admin fees51%55%57%53%Sou

99、rce:Autonomous Oliver Wyman20Whats Next for Japanese Megabanks?Strategy 3ESTABLISH A PAN-ASIAN BANKING POWERHOUSEBeyond adding new services to their business mix,Japanese megabanks can aim to establish themselves as premier pan-Asian banking institutions.International business has become a sizable p

100、ortion of the megabanks profile,with international revenues exceeding domestic revenues for the past five or more years.The megabanks have taken steps to capitalize on this trend by pursuing M&A deals to grow outside of Japan,while also pulling out of areas that no longer are profitable.For example,

101、MUFGs divestment of Union Bank in 2022 for US$11 billion was viewed positively by investors,confirming that stakeholders do not always interpret“bigger”as“better.”While megabanks have expanded globally,investors appear skeptical of how they are positioning their international footprint to operate co

102、herently.For example,the Asia-Pacific(APAC)region(ex.Japan)has been the megabanks most profitable market,yet they trail in returns and valuation against regional peers.Given the megabanks scale alone,there is clear opportunity here to foster greater intra-regional revenue synergy and cross-sales.Ban

103、king opportunities in each geography are heavily linked to their specific role in the broader regions trade and financing corridors.The APAC banking market is disproportionately oriented to corporate and transaction banking(CTB),driven in part by the regions role in international trade and the neces

104、sity of facilitating significant cross-border flows across many jurisdictions.And while the numerous geographies and associated jurisdictions present a challenge from an operational perspective,they also present an opportunity to service and take advantage of those flows.Higher valued APAC-based pee

105、rs(particularly Singaporean banks like OCBC)have explicitly oriented their strategy around understanding and capturing these cross-border flows.To unlock trapped value,Japanese banks must develop an overarching APAC strategy linked to their vision of what the regions corridors and interconnections l

106、ook like today and what they expect them to look like in the next 10 to 20 years.Directing this strategy through a simplified governance model will allow them to tilt resources effectively to generate higher returns,while integrating their footprint more holistically can improve their customer exper

107、ience.These actions in tandem will help communicate a compelling equity story to investors who have so far struggled to understand how to piece the international puzzle together.Doing so successfully and closing even a fraction of the gap with competitors would allow ROTCE to climb to the 911.5%rang

108、e and improve P/TBV ratios to 0.91.3x.Oliver Wyman21Whats Next for Japanese Megabanks?Exhibit 13:Five-year average ROTCE and P/TBV0%2%4%6%ROTCE8%10%12%14%16%18%20%22%0.201.81.61.41.21.00.80.60.42.02.22.4Japanese banks4(JFY 2019 to JFY 2023)1Regional peers5(FY 2019 to FY 2023)2Megabank average consen

109、sus4Improvement assumes closing 60%of the ROTCE gap to Pan-Asian Peers:ROTCE:9.5-11.5%P/TBV:0.9-1.3x SMFGGlobal peers6(FY 2019 to FY 2023)2MUFGMHFGSCHSBCUOBOCBCJFY 20243DBSRBCP/TBV1.JFY2023spansApril2022toMarch2023andJFY2019spansApril2018toMarch 2019.2.FY2023spansJanuary2023toDecember2023andFY2019sp

110、ansJanuary2019toDecember2019exceptRBCwhereFY2023 spans November2022toOctober2023andFY2019spansNovember2018toOctober 2019.3.JFY2024(consensus)spansApril2023toMarch 2024.4.MitsubishiUFJFinancialGroup(MUFG),SumitomoMitsuiFinancialGroup(SMFG),MizuhoFinancialGroup(MHFG).5.DevelopmentBankofSingapore(DBS),

111、UnitedOverseasBank(UOB),Oversea-ChineseBankingCorporation(OCBC).6.RoyalBankofCanada(RBC),HongKongandShanghaiBankingCorporation(HSBC),StandardChartered(SC).Source:VisibleAlpha(consensusestimatesasofJune2024)andOliver Wyman analysisAs discussed earlier,effectively capitalizing on this strategy require

112、s reducing inefficiency and simplifying governance structures and reporting lines.These actions are critical to scale efficiently and to make it easier for investors and analysts to understand and appreciate megabanks strengths.Japanese megabanks tend to be viewed in the market more as a collection

113、of regional businesses,and geographic expansion has added layers of complexity with convoluted reporting lines,siloing,and multiple layers of management.The current megabank setup multiplies reporting lines due both to the three-pillar governance structure(banking,securities,trust)and the tendency f

114、or regional businesses to operate relatively independently(sometimes under a separate franchise).Oliver Wyman22Whats Next for Japanese Megabanks?Some megabanks have attempted to solve this problem by creating additional regional leadership layers,but this can result in a separate dotted line hierarc

115、hy that can make accountability more diffuse.This is particularly evident given that megabank valuations trail those of peers even in geographies where they have a sizeable presence.HSBC,for example,has a similar global footprint but has outperformed Japanese megabanks,as has DBS,a smaller regional

116、peer with a large and growing APAC presence.A good guiding principle in the simplification process is to understand the profile of key client segments being targeted and“work backward”to define structure.If the clients are more global(e.g.,large international corporates),a global service model may b

117、e the best fit,while target client segments with more regional variation may require localized governance structures.Taking this fit-for-purpose approach to restructuring preserves resources and can help to create a competitive edge in each geography.Oliver Wyman23Whats Next for Japanese Megabanks?O

118、liver Wymans Banking Insights Group(BIG)focuses on developing insights across the key macro-trends shaping the future of global Banking&Financial Services.We draw from expertise across Oliver Wymans practices and geographies,including current and former equity analysts.Our goal is to provide financi

119、al institutions with clear,fresh,and incisive perspectives on complex issues in the market.AUTHORSDylan WalshPJulian AdlerPCONTRIBUTORSHuw van SteenisVice CNaoki IsetaniSenior AJaqui PinkCJasper YipPVarun VishnubhatlaEngagement MKeishi HotsukiSenior ASara CotsakisSenior CAngelina OgumaPSeo Young Lee

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