TOKYO -- Mizuho Financial Group and Sumitomo Mitsui Trust Holdings have entered talks to combine their custody services operations, crossing group lines as extremely low interest rates force the industry to compensate for low profits with high volume.
The two aim to integrate Trust & Custody Services Bank, in which Mizuho holds a 54% stake, and Japan Trustee Services Bank, in which Sumitomo Mitsui Trust has a roughly 67% interest. The main proposal entails bringing the custodians together under a single holding company this year. The groups aim to merge the banks by 2020 as well as consolidate their systems, a process that will require a hefty financial outlay.
Mizuho and Sumitomo Mitsui Trust are discussing the move with major shareholders in the banks as well as with the Financial Services Agency. A deal is expected to be announced by fiscal year-end. Such points as the new entity's name and the ownership split will be worked out based on the principle of a merger of equals, the banks say. The two groups will also consider broader partnerships outside the custody business.
Japan's banking sector has been dominated since the mid-2000s by the three megabanks -- Mizuho, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group -- along with Sumitomo Mitsui Trust, which specializes in trust banking. The latter is seen as close to SMFG, which is descended from the same former conglomerates. But substantial overlap between the two groups' customer bases led Sumitomo Mitsui Trust to approach Mizuho instead, seeing such a partnership as a more effective way to cultivate new clients.
Custody services -- a core business of trust banks -- are part of the asset management field. Custodians look after assets entrusted to them by such clients as companies and pension funds, managing investments and handling interest and dividend payments. Mizuho seeks to expand its custody services business after merging its asset management operations with those of Dai-ichi Life Holdings last fall.
The entity created by the proposed merger would boast roughly 380 trillion yen ($3.36 trillion) in assets under custody, double the figure for MUFG-affiliated rival Master Trust Bank of Japan. But this is still an order of magnitude smaller than U.S.-based Bank of New York Mellon's $30.5 trillion or State Street's $29.1 trillion.
Japanese custodians, which deal mainly with domestic clients, lag well behind globally minded foreign rivals. Mizuho and Sumitomo Mitsui Trust plan to combine related overseas operations as well in order to better compete.