ANALYSIS - For MUFG, Morgan Stanley partnership comes up short

TOKYO/HONG KONG Tue May 11, 2010 1:44pm IST

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TOKYO/HONG KONG (Reuters) - For Mitsubishi UFJ Financial Group the start of two ventures with Morgan Stanley last week is more of a missed opportunity than the strategically significant deal the Japanese bank had trumpeted.

Over recent months, the arrangement has been scaled back with the tie-up split into two companies -- Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities -- underscoring how tough it is to marry both a Japanese and U.S. financial group and a corporate bank with an investment bank.

In an ambitious bet that highlighted Asia's growing influence in world finance, Japan's largest lender spent $9 billion on a 21 percent stake in Morgan Stanley in October 2008, rescuing it during the fiercest grip of the global credit crisis.

The investment has paid off, with a 10 percent dividend return worth about $850 million a year, or nearly a third of its expected profit in the past year. Morgan Stanley shares, trading around $28, have trebled from the dark days of the crisis.

But after more than a year of trying to use the investment to hammer out a global partnership, the result is a thinner version of what had been envisaged, with key parts of the operations such as trading books remaining separate.

"As a pure equity investment, it's a success. Such high return investments do not exist in Japan's financial sector," said Shin Tamura, a banking analyst at Barclays Capital Japan. "But it seems MUFG has been unable to achieve its initial target of utilising (Morgan Stanley's) global platform and franchise."

When the tie-up was first announced, the banks stressed the potential operational benefits and set out to achieve a full-out merger of their Japanese brokerages. This was later scaled back to a partial integration, stymied in part by differences in business models, systems difficulties and regulatory hurdles.

According to one Morgan Stanley insider, MUFG hoped the $9 billion infusion would buy the Japanese bank greater control of Morgan Stanley's Asia business.

"If they had majority ownership over us, fine. But 21 percent is not going to get you control of any parts of the business. Not even Asia," said the source, who was not authorised to speak publicly about the relationship.

MUFG will not gain full access to Morgan Stanley's trading operations. Given that it's not a 50:50 venture, much of the banks' business would be expected to remain separate. But access to a shared trading book is a setback for MUFG, and one area where both banks could have benefited from in pulling together.

Trading has helped drive the profit rebound at Wall Street banks, but remains a weak spot for Japanese banks focused on commercial loans.

"The biggest point is to boost our presence in the market by expanding transactions through a combination of Morgan Stanley's network and our client base," Fumiyuki Akikusa, president of Mitsubishi UFJ Morgan Stanley Securities, said last week.

SOMEONE NEEDS TO BUNT

Jonathan Kindred, president of Morgan Stanley MUFG Securities, said there would still be opportunities for collaboration on sales and trading, and noted that Morgan Stanley research would be distributed to MUFG clients.

"This is the best structure, allowing each side to benefit and make best use of their strengths, and offering clients unparalleled services through areas of cooperation," he said. "The two companies, under the structure, have close ties cemented by equity ownership".

The investment banking team -- made up of about 100 Morgan Stanley bankers and 300 bankers from Mitsubishi UFJ -- will work together at Morgan Stanley's offices in Tokyo, aiming to land cross-border deals involving Japanese firms.

But the capital markets operations, which handle equities and debt underwriting, will remain separate, limiting the potential synergies with investment banking.

For MUFG, which hopes to become a bigger player in the global equity and debt markets, it's an opportunity missed.

When MUFG announced the scaled-back plan in November, its president, Nobuo Kuroyanagi, cited regulatory hurdles but declined to give details. Another executive cited differences in risk management and problems with systems integration.

Whatever the differences, there is an appreciation at Morgan Stanley that MUFG stepped in during a crisis, daring to tread where other global institutions, including Morgan Stanley shareholders, were unwilling to go.

Still, sources at the two banks have told Reuters that business culture differences have also hampered closer ties.

"It's not really Japanese versus U.S.-style of business that's the issue," said the Morgan Stanley insider. "It's more commercial banking versus investment banking."

Mitsubishi UFJ is a commercial lender, essentially a massive savings and loan corporation. Buoyed by about $2 trillion in assets, it focuses on the low-risk, low-return business of providing loans, mainly to Japanese firms.

Because of that, it relies on long-term relationships, sometimes at the cost of short-term profit. Wall Street's model, while changing in the wake of the crisis, still favours bigger risk in pursuit of substantially bigger profit.

"You can't have a team where everyone is a slugger, someone has to bunt sometimes. It's not the type of place where you hit a load of homeruns, make a lot of money and then sign on somewhere else next year," said one Mitsubishi banker.

"We're a commercial bank, and that means developing relationships with customers over the long term. We don't take them for a lot of money and walk away."

Tamura at Barclays said MUFG is still better off for teaming up with Morgan Stanley. The investment banking tie will put it in a better position to grab a slice of the growing number of global deals by Japanese firms.

"It's not only Toyota and Canon. Companies that until now have been thought of as purely domestic firms are actively expanding their overseas operations," Tamura said. "In that sense having an alliance with Morgan Stanley has some meaning."

(Additional reporting by David Dolan and Emi Emoto, Editing by Ian Geoghegan)

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