Financial Times

Japan Banking, Finance & Investment

Japan Post privatisation: Behemoth limbers up

By Louise Lucas

Published: September 14 2007 07:17 | Last updated: September 14 2007 07:17

In a couple of years, the millions of Japanese who happily stash their money in post office savings accounts will have a rather more exciting investment opportunity on their doorstep.

Privatisation of the sprawling Japan Post – the world’s biggest financial institution, with Y223,000bn of savings – kicks off in fiscal year 2009, according to the latest timetable, and will culminate in 2017.

The privatisation, the brainchild of former prime minister Junichiro Koizumi, has already caused political ructions. In financial terms, it is nothing short of unleashing a Godzilla on the country’s financial industry.

“Total deposits are one-quarter of the total deposits in Japan, so it is a huge institution,” says Hironari Nozaki, banking analyst at Nikko Citi. He compares it with Germany’s privatisation of Deutsche Postbank, which was the 16th biggest bank in terms of total assets.

Japan Post is big by other measures too. There are some 25,000 branches and 250,000 employees.

When privatisation rolls around, however, would-be investors will be more interested in profitability than size – and on that score, the jury remains out.

Today’s Japan Post Bank falls far short of an aggressively profitable financial services player, lacking a full suite of investment products and being heavily reliant on the yield from government bonds, notes Hirokazu Kabeya of the investment strategy department at Daiwa Institute of Research.

“Its traditional business model has been to lend funds to the government and earn a high interest rate yield. Now that it is going private and is no longer a government organisation, they have a lot of money to play with – but don’t know what to do with it,” he says.

According to the Postal Bank’s own projections, it expects to make net profits of Y130bn in the current fiscal year rising to Y304bn in fiscal year 2011.

But that is assuming – very naively – that interest rates do not rise between now and then. Assuming rates do rise, 2011 net profits are expected to chip in at just Y78bn.

This partly reflects the limited line-up of revenue streams. With privatisation looming, Japan Post began offering investment trusts in 2005 and now sells nine funds managed by external fund management houses. Sales are growing rapidly and it is targeting Y1,100bn this financial year.

If the experience of the banks, which have built up a 50 per cent market share in the past decade, is any guide, Japan Post should be able to trump that many times over in the coming years.

Indeed, by applying the banks’ metrics – they have essentially swept one-10th of individuals’ deposits, into investment trusts – Japan Post could be looking at sales of Y18,000bn, Mr Kabeya calculates.

That should help swell coffers, since the investment trust business is lucrative, generating sales commissions of about 3 per cent and trust fees of some 0.5-0.75 per cent. Fidelity, whose fund is available at postal branches, notes that Japan Post is acting as a catalyst in moving new funds into investment products.

“We are not only seeing a shift within Japan Post savings,” says Akira Ishida, director of business management at Fidelity Japan. “Some of it is new money that their own clients brought in.”

Now the postal bank is setting its sights on other products, including mortgages, credit cards and small business loans, although Nikko Citi’s Mr Nozaki believes this is unlikely to pose a material threat to the commercial banks.

When it comes to mortgages and foreign currency products, for example, Japan Post has limited infrastructure and expertise. In today’s tight labour markets, finding and hiring that expertise is tough, as the banks know.

One option, Mr Nozaki says, would be to develop a network of alliances with the local banks, effectively operating as a distribution arm for products generated by more experienced operators. That would work to the benefit of both parties, in part by streamlining business lines.

Others point out there are already signs of a more commercial mindset at the state-owned behemoth whose business model has centred around recycling savers’ funds into bonds to finance government infrastructure projects.

Robert Feldman, economist at Morgan Stanley, notes that every post office now has its own profit and loss sheet, and can immediately see where money is being made and lost.

Being in the red may not result in closure – in the case of the delivery network, he says, only about a third of offices are profitable but are kept open to provide full national coverage – but it puts more emphasis on efficiency. For the post office, and its advisers, the trick will be to come out with an enticing story to woo investors when it starts selling shares in 2009.

Based on current multiples for banking stocks, the new entity could be worth Y10,000bn, according to Nikko Citi.

An initial sale of, say, one-third would mean tapping the market for nearly $10bn – roughly double the amount raised on the market so far this year, according to Thomson Financial, if the upcoming offering from Sony Financial Holdings is included.

Even that is just one slice of a far bigger pie. Other parts of the post office are scheduled for privatisation: the delivery services and life assurance operation and the holding company. That, however, is much further down the line: the government has given a deadline of 2017.