Morgan Stanley and Mitsubishi UFJ Financial Group plan to widen their 15-year partnership into foreign exchange trading and deepen their alliance in Japanese equities by combining some operations at their brokerage joint ventures in the country.
The goal is to overtake Nomura to become the top securities firm in Japan.
MUFG and Morgan Stanley said "Alliance 2.0" will build on the collaboration they have had since 2008, when the Japanese bank pumped US$9bn into Morgan Stanley when it was in trouble. Since then, the firms have collaborated in global investment banking and have two Japan securities joint ventures. They also refer business to each other globally – such as M&A and ECM advisory work for Morgan Stanley, or utilising MUFG's huge balance sheet.
MUFG still owns 22.6% of Morgan Stanley, worth US$35bn at current prices. It has also received regular dividends and coupon payments, making it one of the most successful investments of the series of 2008 rescue deals.
Other Japanese banks are also trying to replicate the partnership. Mizuho Financial Group is buying US boutique Greenhill for US$550m, while Sumitomo Mitsui Banking Corporation is tripling its stake in Jefferies to 15% and the two firms plan to widen their partnership.
Morgan Stanley and MUFG said on Tuesday their plans to collaborate in FX and to go further with Japanese research and equity businesses should be up and running in the first half of 2024.
The banks said operating revenues for their two JVs were ¥381bn (US$2.7bn) in the year to the end of March 2023, ranking second for Japanese securities revenues behind Nomura's ¥489bn. The JVs ranked first for bond underwriting in Japan last year, but were fifth for M&A advisory (although higher in past years) and fifth for equity underwriting in the country – showing room for improvement given the US bank's strength in those areas.
"These initiatives are significant, not only in terms of providing better services to our clients but also as examples of ways our two firms can continue to work together and deepen our strategic alliance over the years to come," James Gorman, CEO of Morgan Stanley, said in a statement.
The FX push is being undertaken because competition in that market has intensified due to the electronification of trading and with new entrants driving technology innovation, meaning the business is even more of a scale game, requiring increasing technology investment.
The two banks plan to pull together MUFG's trading relationships with Japanese clients and strength in yen and Asia currencies with Morgan Stanley's trading relationships with global institutional and corporate clients, and use its FX platform. The FX sales businesses will continue to be operated by each firm independently.
The banks plan to integrate the Japan equity research, institutional sales, corporate access and part of execution services functions of both of the JV businesses that were formed in May 2010 – Mitsubishi UFJ Morgan Stanley Securities (MUMSS) and Morgan Stanley MUFG Securities (MSMS). They will be integrated into MSMS, and about 100 staff will move over.
Big in Japan
The timing could be good given increased interest in Japan's stock market: the TOPIX is up 20% this year and reached its highest level since 1990, prompting more interest from foreign investors, including Warren Buffett's Berkshire Hathaway.
Morgan Stanley owns 40% of the Japan JVs and MUFG owns the other 60%. MUFG said in the year to March 2023 its profit from the JVs was ¥94.4bn, accounting for 9.3% of its profits.
MUMSS' strength in bond underwriting is helped by its having a leading position in ESG, where many banks are trying to build up expertise. MUMSS said it underwrote 123 green, social or sustainability bond deals last year, raising ¥530bn.
The two banks also team up in other areas, and have a loan marketing JV in the US; referral arrangements in Asia, Europe, the Middle East and Africa covering capital markets, loans and fixed income sales; and a global commodities referral arrangement. There is also an employee secondment programme, in which more than 80 staff have participated.
That may have prompted MUFG's megabank rivals to try and replicate the alliance. Japanese banks have a mixed reputation for investment bank ambitions, marked by fits and starts and a perception that there is often a difficult culture clash with US peers in particular.
Mizuho said in May it was buying Greenhill to accelerate its investment banking growth strategy. It was also seen as a lifeline for Greenhill, which had been struggling to keep up with rivals such as Moelis, PJT Partners and Perella Weinberg Partners.
In April, SMBC said it would ramp up its investment in Jefferies and the two firms would collaborate on more investment banking activities, including equities and DCM businesses, mostly in US markets. The alliance previously targeted leveraged finance, M&A involving Japanese companies, and the US healthcare sector.