Sumitomo Mitsui Financial Group Inc (SMFG) is looking to expand its alliance with Jefferies Financial Group Inc, possibly working together in new areas such as equity trading to build up its global business, according to the bank’s chief executive officer.
 
Under the collaboration that started in 2021, Japan’s second-biggest lender has worked with Jefferies to compete in the US financial markets. The focus so far has been on ramping up underwriting of new stocks and bonds as well as advising on deal making. Now Toru Nakashima, Sumitomo Mitsui’s CEO, is considering whether the two firms can also join forces in the share market.

“Except for Japanese stocks, we are weak in equities and it will take a lot of work to build up equity trading from scratch,” he said in an interview. “So, I am wondering if there are ways to use Jefferies’ platform.”

Sumitomo Mitsui has been working to enlarge its trading operations in the US, but they are mainly in interest rates and investment-grade credit, said Nakashima, who has been with the banking group since joining one of SMFG’s predecessors in 1986.

It’s not hard to see the appeal of equity trading for a big bank like SMFG. The total value of shares has doubled globally in the past decade to around US$125 trillion , Bloomberg-compiled data show, and banks have profited in bullish periods. 

Jefferies’ equities business jumped 42% in its fiscal third quarter, helping push up revenue at the firm’s capital-markets unit by 28% from a year earlier. At Goldman Sachs Group Inc, its stock-trading unit posted a revenue of US$3.5 billion in the third quarter, the best showing since the first quarter of 2021. Their Wall Street rivals saw revenue from trading climb as well.

Nakashima has said SMFG hadn’t been able to take advantage of relationships with US corporate clients due to weakness in equity underwriting. The alliance seeks to fix that, with the Japanese bank bringing its massive balance sheet and debt capital markets expertise, while Jefferies comes with plenty of experience in M&A advisory and equity financing services.

Already, the alliance appears to be bringing in more business for the two firms. Sumitomo Mitsui’s ranking for US equity offerings has climbed to 24th so far this year from 50th in 2020, the year before the year before the Japanese lender bought its Jefferies stake. In US investment-grade corporate bond sales, Jefferies was 31st so far in 2024, compared with as low as 56th in 2022, according to Bloomberg-compiled data.

Sumitomo Mitsui currently has about 15% of “economic ownership” in Jefferies through its holdings of non-voting shares. Asked about the possibility of increasing that stake, Nakashima said the matter can’t be determined by Sumitomo Mitsui alone and there is no such plan at this moment.

“This is something that could be considered in the future. Jefferies’ valuation has become very big, so the investment would need a lot of money,” he said, adding that such action will also require regulatory approval.

Jefferies’ price-earnings ratio is around 34 times, among the highest compared with peers such as Lazard Inc, and exceeding those of industry giants like Goldman Sachs and Morgan Stanley.

Nakashima reiterated his intension for the alliance to drive growth in the Asia-Pacific region. “Jefferies has strong operations in Australia and India, where we don’t have much investment banking capabilities,” he said. 

Sumitomo Mitsui is considering setting up a back-office and IT centre in India, following its top domestic competitors Mitsubishi UFJ Financial Group Inc and Mizuho Financial Group Inc, who already have such functions in the country and have hired hundreds of staff, Nakashima said.

“India is a strategically very important place for us,” said Nakashima. “In addition to our banking business, it’s an extremely important location for IT development, talent acquisition and back-office services,” he said, adding that the timing of the India project hasn’t been decided.

Sumitomo Mitsui and rival Japanese banks are enjoying bumper earnings, thanks to strong businesses at home and overseas. Japan’s three biggest banks are forecasting record full-year profits for the year ending in March, with Sumitomo Mitsui expecting a 20% jump in net income to ¥1.16 trillion .

Nakashima said he’s confident that SMFG will set another record earnings next year, and the bank is aiming for net income above ¥1.2 trillion.

“In the US, the positive impact of the Trump administration will manifest first. At least in the short term, I think the US economy will be good,” he said. “In Japan too, I think the government will take stimulative economic measures.”

There’s concern in the market though that if bigger government spending by Japan is not accompanied by economic growth and an increase in tax revenue, risks will rise of a downgrade in the nation’s sovereign credit ratings.

“If worries about JGB’s [Japan government bonds] credit rating emerge, our dollar-funding costs will shoot up. And for the overall Japanese economy, there will be a big negative impact,” he said.

Still, SMFG is seeing very strong loan demand in Japan, especially from big- and middle-size companies, as they are ramping up spending on digitaliation and decarbonisation efforts as well as construction of data centres. 

“Due to labour shortages, companies can’t implement capital expenditure plans as fast as they intend. There is a backlog piling up,” Nakashima said. “So, I think corporate loan demand will remain strong in Japan for the next few years.”

  - Bloomberg