Last year, a steady stream of executives, traders and analysts poured out of Japan’s banking system to join foreign investment banks.

The exodus was so bad that at one point, top executives asked Brian Murdoch, president and CEO of Merrill Lynch Investment Managers, to stop recruiting staff from Japanese banks.

Murdoch said he understands their concern and avoids recruitment that could antagonize his clients. “In the financial services, the only real asset you have is the people,” he said.

The loss of key-post staff comes just as major Japanese banks are striving to regain their lost confidence and become true global players.

Besides Mizuho Financial Group, three more megabank groups — Mitsubishi Tokyo Financial Group, Sumitomo Mitsui Banking Corp. and United Financial of Japan — will come into being in April.

Then, why are so many people leaving top Japanese banks for their foreign rivals and what does this indicate for their future?

The megabanks clearly need to cut costs and streamline to reap the benefits of consolidation. But those employees leaving of their own volition will tend to be the ones banks want to keep.

Defectors give varying explanations: cutthroat rivalry with merging banks for control of choice sections, better pay at foreign institutions and frustration at the slow pace at which Japanese banks adopt new technology.

Corporate culture also means a lot, said an executive of Citibank NA. Bank of Tokyo, for which he initially worked, was Japan’s elite international lender and gave employees free rein to make the most of their individual expertise, he said.

That rarity for a Japanese bank, however, was eliminated when the bank merged in April 1996 with Mitsubishi Bank to create Bank of Tokyo-Mitsubishi, he said.

Corporate identity is hampering restructuring. Infighting has developed as bankers strive to protect their own as posts are decided, slowing the pace of integration.

“It’s Kosovo,” said Yutaka Endo, general manager of Industrial Bank of Japan’s investment banking headquarters, alluding to the civil war.

IBJ, Fuji Bank and Dai-Ichi Kangyo Bank, which integrated under Mizuho Holdings Inc. in September, still retain their respective names and branches. And the Mizuho group is now three-headed, with IBJ President Masao Nishimura and Fuji Bank President Yoshiro Yamamoto serving as chairmen and co-CEOs of Mizuho and DKB President Katsuyuki Sugita as president and co-CEO.

But in April 2002, the three banks will merge into two Mizuho banks, an investment bank and a retail bank. By then, the Mizuho group vows to have just one CEO.

But who it will be is still up in the air. In the meantime, each faction tries to block the other, hampering decision-making, Endo said.

For some within the Mizuho group, the ongoing turmoil is all too familiar.

DKB, which is the product of a 1971 merger between Dai-Ichi Bank and Nippon Kangyo Bank, had to start with three personnel sections, one each for Dai-Ichi and Nippon Kangyo and another for the merged DKB. That nightmare is rapidly unfolding again.

“It would be quicker if one leader would appoint one person for each division and let them appoint the best people — theoretically,” Endo said. “Everybody knows this, but this would leave many bad feelings.”

Mizuho’s experience is providing a lesson to its rivals.

To reverse the outflow of bank executives, BTM hired a headhunting firm to find experienced staff, said Akira Tomioka, director of structured finance at Bank of Tokyo-Mitsubishi.

Likewise, UFJ is outsourcing its personnel decisions. By using a human resources agency, the bank will ensure fair decision-making based on merit, PR officials said.

UFJ recently vowed to slash 7,000 jobs and 108 branches by March 2005, up from the originally planned 6,000 jobs and 68 offices. Executive posts will be cut by 20 percent to 30 percent, while those remaining will have their pay reduced.

Still, problems remain, said Brian Waterhouse, senior analyst of HSBC Securities Co., citing the lack of a clear-cut restructuring strategy.

Mitsubishi Tokyo Financial Group aims to cut 11 billion yen in costs through fiscal 2003 from its fiscal 1999 levels, while Sumitomo Mitsui pledged to reduce costs by 47.6 billion yen by eliminating 9,300 jobs and 303 branches before March 2005. Mizuho aims to slash its total workforce by 7,000, or 20 percent, to around 28,000 and to prune 30 percent of its domestic and overseas branches, leaving 550, before 2005.

But this is where banks are running into trouble.

“All four megabanks have proposed new endeavors and investments in new projects,” Waterhouse said. “But none has clearly stated which projects — and people — will be cut.”

And squabbling over personnel affairs could easily affect the operations, preventing timely decision-making.

“There are people in middle-management levels who know better. But cutting projects means cutting a pet project created by someone higher up,” Waterhouse said.

“Japan’s banks don’t know who their customers are. . . . They simply gave loans to anyone who had the adequate collateral,” he said.

That may turn out to be a critical defect for the megabanks, which need to change their methods if they hope to become full-fledged global players.

Interest revenues on large corporate loans are shrinking as highly rated major firms increasingly look to stocks and bonds for cheaper funds.

Thus, banks need to look to small and midsize firms, including venture businesses, as borrowers. At the same time, they must expand commission-earning businesses, such as cash management services and advisory services on mergers and acquisitions, while boosting their capability to cope with newly emerging business fields such as electronic banking.

But all of this requires building good risk-assessment mechanisms and a sophisticated customer database.

Ahead of its inauguration last year, the Mizuho group said it would carry out strategic information technology investment worth 150 billion yen annually to upgrade its customer databases and global risk-measurement systems. The scale of investment is on a par with that of major U.S. banks, it said.

Sumitomo Mitsui meanwhile aims to become a leader in e-commerce through its ties with online bank Japan Net Bank — a 20 billion yen venture in which Sakura Bank and Sumitomo Bank together own 60 percent of shares — and online discount broker DLJ Direct SFG Securities.

In a tieup with NTT-ME Corp., it will also launch a 1.5 billion yen investment fund in April to support venture firms. By finding and nurturing growth businesses at an early stage, the bank hopes to earn consultation fees and uncover future fund demands.

Sumitomo Mitsui will also make an IT-related investment of 100 billion yen annually to expand its database.

Katsuhito Sasajima, senior analyst at UBS Warburg, however, said Japanese banks remain far behind foreign banks in risk-assessment technology.

In dealing with human resources, Japanese banks may not be able to count on traditional loyalties to catch up with the fast changing needs of time, he said, noting foreign investment bankers are way ahead in the lucrative areas of investment banking and asset management.

Buying in expertise, like buying an investment bank in the U.S., will probably be the most efficient way to enter new business, he said.

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