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In Japan, Nomura is hard to beat. Japan’s largest brokerage house has about a third market share at home. This is all the more impressive considering how fragmented the market is, with over 200 competitors.
Of them, Daiwa Securities is in second place. But closing the gap with Nomura has long seemed like an arduous task. His last effort—acquiring a large stake in Aozora, Japan’s worst-performing bank stock—failed miserably. Daiwa shares fell nearly 5 percent on Tuesday, even though the deal gave Daiwa a discount on its stake compared to the unchanged price. This bet may not be as reckless as the market reaction suggests.
Daiwa, Japan’s second-largest brokerage, agreed to buy a stake in Aozora Bank – a mid-sized bank with a market value of $1.8 billion – from a fund linked to Yoshiaki Murakami, the most famous activist investor. from Japan. This brings its stake in Aozora to 24 percent.
Daiwa investors’ concerns are understandable. Aozora shares have been on a rollercoaster ride after it posted its first loss in 15 years earlier this year. Large losses on its U.S. office real estate loan portfolio shocked its conservative retail investor base.
But Aozora’s history in the US commercial real estate and agency bond market is not necessarily a bad thing for Daiwa. Like its local brokerage peers, Daiwa has a strong track record in stable businesses such as mutual funds and wealth management. He has stuck to a conservative management style, similar to that of bigger names like Mizuho.
These brokers are beginning to face intense and unprecedented competition from online brokers in Japan. The concern is that upstart online rivals have been undercutting each other to offer zero commissions for cash and margin trading in Japanese shares for the past year. A more aggressive change in strategy is necessary.
While the stock market’s reaction to Aozora’s loss was dramatic in February, U.S. office loans accounted for less than a tenth of its total loan portfolio. The liquidation was both a reflection of how stable its performance has been since 2008 and of investor concern about its overseas business strategy. Its shares trade at just over 0.7 times tangible book value, a discount of about a quarter to its local rivals.
Daiwa will gain an advantage over rival brokers thanks to Aozora’s ability to offer a variety of lending services. As competition for brokerage commissions increases, it may also have things to learn from Aozora, which has survived more than two decades of severely reduced internal returns.