Japanese megabanks to save US$2.9b from staff reduction plans

Rising payroll expenses were a key drag on the banks’ financial performance.

According to Moody's, on 28 October, The Nikkei reported that three Japanese megabanks plan to conduct a structural overhaul that cumulatively will reduce their employee count by 32,000. These restructurings by Mitsubishi UFJ Financial Group, Inc., Sumitomo Mitsui Financial Group, Inc. and Mizuho Financial Group, Inc. are credit positive because they will reduce operating expenses and improve efficiencies.

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The potential cost savings from these initiatives are substantial considering that the 32,000 potential job cuts will more than reverse the three banks’ 20,000-headcount increase over the past two years. Indeed, rising payroll expenses were a key drag on the banks’ financial performance, with the three banks reporting an 11% aggregate increase in their operating expenses in the fiscal year that ended March 2017. That increase more than offset a 5.8% increase in operating revenue and led to a 1.4% drop in net income.

Based on data from the Japanese Bankers Association, we estimate that a 32,000-employee payroll reduction would reduce costs by at least 330 billion yen (US$2.9b), an amount equal to 11% of the three banks’ combined pre-tax income for the fiscal year that ended March 2017.

We do not expect the three banks to conduct the kind of massive layoffs prevalent in some western countries. Instead, the planned staff reductions likely will take place over years through attrition and scaling back new hires, which will minimize potential restructuring charges. For example, the Nikkei article reported that Mizuho would reduce its workforce by 8,000 over five years and by a total of 19,000 over 10 years.

These job cuts will reduce the three banks’ personnel expenses in existing business, thereby supporting their profitability. The bulk of the cost savings will come from the retirements of mid-level employees hired during Japan’s bubble period (1980s and 1990s) and whom typically command above average salaries owing to Japan’s seniority-based system, which typically includes annual pay rises. Shrinking this employee group, combined with fewer new hires, will translate into substantial costs savings.

The operational effect of fewer employees will be manageable given the three banks’ moves to automate their processes and focus on profitability to stay competitive. We expect the three banks to compensate for the fewer employees by improving the efficiency of those who remain and by applying new technologies to improve operations.