Mizuho pays price of late entry into Japan's competitive online trading market – S&P Global

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Mizuho pays price of late entry into Japan’s competitive online trading market
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Mizuho Financial Group Inc. paid for a stake in Rakuten Securities Inc. as the Japanese megabank seeks to tap the nation’s shift toward online trading. The question for investors is whether it paid too much.
The lender bought 20% of Rakuten Securities for ¥80 billion on Nov. 1, via its investment bank arm, Mizuho Securities Co. Ltd., giving it a foothold in one of Japan’s two dominant online brokers. The deal valued privately held Rakuten Securities at ¥400 billion, or 2.8x its ¥144.3 billion of net assets as of September.
The valuation surpassed that of Japan’s two listed online brokers, fanning skepticism about whether Mizuho will be able to generate sufficient returns from low-margin Rakuten amid a nationwide stock-dealing price war. The lender also lagged behind fellow megabanks Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. in buying into an online broker, potentially further complicating efforts to profit from Japan’s younger and more tech-savvy investors.
“Mizuho made a bad bargain as they made a late start in online trading,” said Makoto Kikuchi, CEO of Myojo Asset Management Co.
Spokespeople at Mizuho and Rakuten Securities declined to comment on the valuation.
Buying into Rakuten Securities gives Mizuho access to the online trader’s 8.05 million accounts, as of June 30, and a customer base that is predominately aged 20-40. Only SBI Holdings Inc. boasts more online accounts in Japan with 8.83 million, according to an Oct. 26 research report by SBI Securities.
Customer numbers at the megabanks, which have more traditional offline operations, are diminutive compared to those of the two online brokers. Mizuho Securities had 1.38 million online trading accounts at the end of June, little changed from a year earlier, according to an earnings presentation. Just 28% of its customers’ equity deals by value were done online in the June quarter, unchanged from a year ago.
SMBC Nikko Securities Inc., a unit of Sumitomo Mitsui, had 3.24 million online trading accounts at the end of June, according to SBI’s Oct. 26 report. Mitsubishi UFJ Financial Group’s au Kabucom Securities Co. Ltd. unit had 1.45 million online trading accounts as of June 30, the report said.
Fast-growing market
Mizuho was the second megabank to invest in an online dealer this year. Sumitomo Mitsui bought about 10% of SBI Holdings in July for about ¥80 billion. Mitsubishi UFJ Financial Group acquired 51% of au Kabucom Securities, then known as Kabu.com, in 2007. The remainder of au Kabucom is now owned by KDDI Corp.
Megabanks have bought into online traders to add new technology and customers, and also to boost growth amid ultralow interest rates and soft domestic credit demand. Nationwide, the number of online accounts has surged 63% in five years to 34.7 million, according to the Japan Securities Dealer Association. That is equal to about a quarter of the country’s population.
Rakuten Securities, which was founded in 1999, has grown its business by pursuing a low-cost, high-volume strategy trading costs as little as ¥55. This potentially adds to Mizuho’s challenges in profiting from the investment, as Rakuten’s net margin in 2021 was just 10.6%. That contrasts with 25.5% at SBI Securities, 38.9% at Matsui Securities Co. Ltd. and 9.4% at au Kabucom Securities for the fiscal year ended in March 2022.
“I can’t say if Mizuho’s investment will be successful,” said Tsuneo Watanabe, an executive at Nihon M&A Center, a Japanese M&A advisory firm.
Strategy ahead
Greater pricing competition may further pressure margins. SBI, for instance, plans to waive brokerage commissions for trading domestic stocks starting in the first half of 2023.
Such a move “would intensify industry competition and make profits thinner,” said Koichi Niwa, an analyst at Citigroup Global Markets Japan.
There are steps that Mizuho could take in order to improve Rakuten’s performance and to generate a return on its investment. For instance, sales promotions could bolster the online broker’s earnings, especially given its growth in accounts, according to the Oct. 26 note by SBI.
Mizuho’s investment “is not necessarily overpriced as it has leeway to improve earnings,” the note said.
The bank also plans to profit from the deal via cross-selling. It intends to offer its own products and services to Rakuten customers, including stocks or bonds that it underwrites, according to a Mizuho Financial spokesman. Plans also include face-to-face consultations on long-term financial planning.
Still, Rakuten’s online customers may be uninterested by the offer of in-person meetings, according to Citigroup’s Niwa. Mizuho also has to wring out a lot from the deal to justify the 2.8x book valuation. Matsui Securities trades at a 2.62x book value, while Monex Group Inc. is at just 1.14x, based on Nov. 9 share prices.
“It’s challenging for Mizuho to benefit from its investment,” Niwa said.
As of Nov. 21, US$1 was equivalent to ¥141.94.