MUFG-Grab deal shows Japanese banks' curiosity in SEA

But Fitch warns it could lead to higher costs and put pressure on profits.

Mitsubishi UFJ Financial Group’s (MUFG) investment in Grab highlights the growing interest of Japanese banks in Southeast Asian tech firms despite higher risks, according to a Fitch report.

With the Grab investment, the bank aims to leverage the firm’s IT platform to sell financial services in SEA notably through its consolidated and non-consolidated “partner banks” in Thailand, Indonesia, the Philippines and Vietnam, the report explained.

The $706m investment is not expected to have a notable impact on MUFG’s financial position as it would only translate to less than 1% in tangible equity. It is still too premature to tell whether the potential benefits can be realised, noted Fitch.

Nevertheless, MUFG’s overseas expansion is not without risks, as shown when it recently wrote down goodwill on the Bank Danamon investment. But the bank has been known for spotting risk points at an early stage and reducing possible problems that may arise, Fitch added.

The Japanese banking sector will continue to struggle in generating revenue amidst persistently low domestic interest rates and high competition, and to weather this, several banks have been expanding into faster-growing markets. However, Fitch warns this could lead to higher costs related to credit and regulatory compliance, therefore putting pressure on profits.

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“Expansion into faster-growing emerging markets, which tend to be associated with weaker operating environments, can also give rise to risks that need to be managed appropriately, for example through increases in loss-absorption buffers or tighter risk management processes,” Fitch concluded.