Block Trades Herald $5 Billion Fee Windfall For Japan's Brokers

(MENAFN- Live Mint) The great sell off of Japan's cross-shareholdings has started and brokers are jockeying for a slice of the billions of dollars in fees at stake.

Nomura Holdings Inc. is offering clients bespoke ways to offload such stocks, while Daiwa Securities Group Inc. has added experts in so-called block trades to a team that manages relationships with corporate customers. bank of America Corp. is leaning on its Network of global clients to help firms dispose of their holdings and Mitsubishi UFJ Morgan Stanley Securities Co. is looking to staff up across equity financing.

Pressure from the government and investors to improve corporate governance is leading firms to whittle down the estimated 50 trillion yen they hold in companies with which they do business. More than a thousand listed firms in Japan have recently promised to reduce such shareholdings, including marquee companies such as Toyota Motor Corp. For brokerages handling the transactions, which include secondary offerings and block trades, the fees could reach between $2 billion to $5 billion, according to Bloomberg Intelligence analyst Hideyasu Ban.

“The liquidation represents a major business opportunity for our company,” said Satoshi Yamamoto, head of Daiwa's global markets strategic planning in Tokyo.“There is an irreversible trend for companies to improve their capital efficiency. This will remain a big theme over the coming several years for Japan's stock market.”

Actual profitability will vary from deal to deal. For example, block trades – the purchase or sale of a large volume of shares off regular market hours – typically generate more fees than facilitating simple share buybacks. The higher margins carry some risk for the brokerages. Block trading allows clients to sell big chunks of shares privately with minimum market impact. But the practice requires the delicate act of sounding out potential buyers while ensuring that no customer would use the information to make well-timed bets on stocks ahead of deals.

Failures to properly manage information have resulted in various scandals, most recently insider charges involving hedge fund Segantii Capital Management Ltd. In Japan, a local court last year found SMBC Nikko Securities Inc. guilty of having manipulated share prices ahead of block offers.

What Are Block Trades? Why Are They in the Spotlight?: QuickTake

The number of block trades and share placements in Japan is rising, with 55 so far this year, a 53% increase from the same period in 2023. In the Asia-Pacific region overall, block trades and share placements have risen just 9%.

There is a lot of investor appetite for Japan block trades from across the Asia-Pacific region, both from hedge funds and long only funds, according to a banker at a Wall Street firm.

There is also ample interest from US-based clients. Two years ago, one block would attract interest from about 50 investors. Now, it can easily get to 200-300 investors, the person said, who asked not to be identified discussing market sensitive information.

Despite the high demand, rivalry among the banks to win mandates also threatens to erode margins. That is already happening, according to Nomura, Japan's biggest brokerage.

“There is excessive competition under way in some part of the market to lower transaction fees,” said Takashi Otsuka, managing director and head of the Investment Banking Strategic Planning Department at Nomura.“We have seen cases where fees are set at levels that aren't commensurate with the risks involved.”

For decades, companies have owned each other's stocks which has helped shield management from pressure from shareholders. The practice has also tied up capital that could otherwise be invested in potential opportunities for growth.

The government is also concerned that the close ties between firms undermine competition. After a price-fixing scandal, Japanese casualty insurers agreed earlier this year to unwind more than 6 trillion yen in cross-shareholdings in response to government demands.

The issue of cross-shareholdings has been around for years, but companies didn't want to take the risk of antagonizing corporate clients and postponed action, according to Daigo Shimizu, a so-called sustainability evangelist at Mizuho Securities Co.

“But in the wake of the insurance scandal, the authorities wielded their scalpel to great effect,” he said.

That decision accelerated the trend. Since then, Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. have crafted a plan to divest 1.32 trillion yen worth of strategic shareholdings in Toyota in accordance with the carmaker's stock buyback. Toyota in turn is reportedly selling off part of its stake in parts maker Denso Corp. This is keeping brokerages busy.

“We are making more proposals and giving more advice than ever,” said Ren Motokawa, a managing director and head of investment banking strategies at SMBC Nikko, the brokerage arm of Japan's second largest banking group.

Coupled with Japan's booming stock market, the prospect of steady business for the brokerages over the next several years has helped them outperform the broader market. Nomura has gained 56% so far this year and Daiwa is up 41%, outpacing the 23% rise in the Topix.

“Unwinding cross-held shares is clearly a positive for Japanese securities firms' profit outlook in the second half of the 2020s,” said Michael Makdad, an analyst at Morningstar Inc.

Still, not all companies agree that it makes business sense to offload stocks that have appreciated over decades. Kyoto Financial Group Inc. is determined to hang on to its stakes in hometown champions Nintendo Co. and Nidec Corp. The bank has more than $6 billion in unrealized gains on its equity holdings.

Additionally, the companies whose shares are sold are often not happy at the prospect of losing a friendly shareholder. Sompo Holdings, one of the insurers that have pledged to sell off their stakes in client companies, is trying to make sure that the process does not alienate them. It holds stakes in about 700 listed companies and roughly 860 unlisted ones. The firm intends to talk with each company before it sells its stock. This process means they won't be finished until 2030.

“We need to explain, because up until now, we have been saying there are legitimate reasons for holding such shares,” said Sompo Chief Executive Officer Mikio Okumura.

With assistance from Filipe Pacheco.

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