By Anton Bridge and Miho Uranaka
TOKYO, June 4 (Reuters) – Japan’s Sumitomo Mitsui Financial Group is aiming to double revenue in its sales and trading business to 800 billion yen ($5 billion) within the next few years, its head of global markets said, as the bank seeks to catch up with its rivals.
Rising interest rates, currency swings and record stock prices in Japan are driving demand for trading products, said Arihiro Nagata, head of SMFG’s global markets division.
“At the moment we’re at about 400 billion yen, but I’d like to double it in a few years. Conservatively it should be possible in about six years,” Nagata told Reuters in an interview on Monday.
The target marks SMFG’s effort to make up ground lost to rivals who have beefed up their markets businesses in recent years, profiting from an uptick in trading activity as interest rates in Japan gradually rise after decades of deflation.
The sales and trading business provides market liquidity, hedging and investment products to investor and corporate clients.
“With interest rates normalising there’s a significant increase in cases where we’re being asked to trade. Demand for JGBs, yen interest rate swaps and Japanese equities is on the rise, among foreign investors too,” Nagata said.
Concerns over rising inflation and Japan’s deteriorating finances pushed up the 10-year JGB yield to a 30-year high of 2.8% last month, while Japanese stocks hit a record high on Wednesday, with the Nikkei closing above 68,000 yen for the first time.
“In the zero-interest-rate period domestic investors made up 70% of our yen interest rate swap flow. Now foreign investors make up 70%,” Nagata added.
Sales and trading is also better placed to capitalise on market volatility than a business model centred on bank lending, Nagata said.
“We haven’t had a genuine financial crisis since the Lehman shock. We don’t know when a credit event will come, but when volatility is up, rather than having the commercial bank front and centre, sales and trading is the way to go,” Nagata said.
The Lehman shock refers to the collapse of Lehman Brothers in the early stages of the 2008 financial crisis.
Rivals are also repositioning their trading desks in anticipation of sustained volatility. Nomura has been hiring in its macro business, which includes interest rates and foreign exchange trading and typically performs well during periods of high volatility.
SMFG, Japan’s second-largest lender, has restructured its trading business to better integrate functions performed by its banking and securities arms and it is also looking for opportunities to build on its alliance with U.S. investment bank Jefferies, in which it holds a 20% stake.
“At last it feels like a globally connected team,” Nagata said.
($1 = 159.9700 yen)
(Reporting by Anton Bridge and Miho Uranaka, Additional reporting by Makiko Yamazaki; Editing by Sonali Paul)
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