Corporate finance is present in all sectors of the economy. Recently, Sumitomo Mitsui Financial Group, a Japanese asset manager, has reached an agreement to acquire TT International, a London-based independent asset manager specialising in equity investments in emerging markets.
The business model of this bank holding company is divided into four different lines:
In order to strengthen its asset management division, the holding company has recently agreed to acquire TT Internationalan independent asset manager specialising in emerging market equities based in London. Although the terms of the deal have not been disclosed, Reuters reports point to an amount of around €170 million, to be formalised in March 2020.
This operation is the first procurement The group's objective is to stimulate the management of equity assets in emerging countries. TT International has a total of US$8.4 trillion under management, of which around 60% is invested in emerging markets, particularly in Asia.
This purchase continues Sumitomo's efforts to strengthen its asset management division, following on from the acquisition of Daiwa SB Investments in April. The transaction pursues two key objectives: on the one hand, to gain expertise in emerging markets and, on the other hand, to provide the division with a steady and predictable flow of sales. This last point is particularly important in the Japanese context, where interest rates have been low or even zero for more than a decade. This situation has led the holding company to opt for a fee-based business model, which tends to be high in equity management.
We now turn to the impact and prospects of this acquisition for Sumitomo from a corporate finance perspective.
It is worth noting that around 701 bT$1T of the group's revenues come from Japan, while around 131 bT$1T comes from EMEA and less than 101 bT$1T from Asia and Oceania. This concentration of its business in Japan could pose serious risks for the bank, as its lack of exposure to other markets makes it heavily dependent on Japan's economic and financial situation.
It can be seen how revenue maintains stable growth in recent years, in line with the expansion of its assets. In the last fiscal year 2018, Sumitomo achieved a growth of 14%, mainly derived from the gains of its financial instruments.
Net profit soared by 201 Q1Q1 thanks to higher operating income accompanied by lower depreciation and amortisation.
Sumitomo's strategy is based on conducting its operations in the most efficient and sustainable manner possible, with a special effort to minimise the risks of its assets, reducing investments in low margin assets and at the same time increasing its exposure to more efficient and higher margin assets. The acquisition analysed here should be seen in this light, as it has increased its exposure to equity asset management in an attempt, as explained above, to boost this line of business to the detriment of fixed income, which has been weighed down by the very low interest rate situation in Japan.
As can be seen, Sumitomo has been penalised in the financial markets over the last year. However, since the beginning of this year it has managed to maintain a stable share price, with a slight decline in July from which it has now recovered. However, taking a broader perspective, it can be seen that this is the case in most of the banking sector around the world. Low interest rates in most of the world's economies, as well as low growth expectations in the coming years have caused a decline in the price of these companies.
This situation is likely to continue in the short to medium term, which does not seem to indicate that a significant increase in share prices in this sector is likely.