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Morningstar | Lacking profitable retail units and unable to grow aggressively overseas, Mizuho must cut costs.

Mizuho Financial Group is one of Japan’s three largest banking groups, with an 8.4% share of domestic loans and 9.0% share of deposits as of March 2018. In Japan, the environment for banks has been tough for years and we expect it to remain so. The long-running deflationary environment in the country has led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 55% at present. The liabilities/net assets ratio for Japan’s approximately 1 million business corporations has declined from a highly leveraged 4 times in the mid-1990s to a healthy 129% as of June 2018, but corporate borrowers prioritize cash flow for paying down existing debt, rather than taking out new loans for investment. This comes even as the average interest rate on new bank loans has declined by 100 basis points over the past decade to below 0.7%. Facing such a tough environment in its home market, Mizuho expanded its overseas business quite rapidly in the first half of this decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. However, Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, recording only slight growth outside Japan since March 2016. Compared with its Japanese megabank rivals, which have only taken controlling or affiliate stakes in local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank, and almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities).Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.