UPDATE 2-Mizuho shuts Singapore prime brokerage unit – documents

* Worries on capital levels lead to move

* S’pore operation to post $15.6 mln pre-tax loss for year
to March

* To bear $3.4 mln in IT costs of Singapore operation

* 13 staff being laid off

(Recasts with more details from documents; adds background)

By David Dolan and Saeed Azhar

TOKYO/SINGAPORE, April 7 (Reuters) – Mizuho Securities
shut down its money-losing prime brokerage business in
Singapore due to worries it would keep eroding its capital,
putting it at risk of losing its operating licence, documents
obtained by Reuters showed.

The documents illustrate the difficulty Mizuho Securities,
a largely domestic-focused Japanese brokerage, faces in its
effort to become a pan-Asian equity powerhouse that can compete
with the likes of Goldman Sachs , Morgan Stanley
and Deutsche (DBKGn.DE: Quote, Profile, Research).

A unit of Japan’s second-largest bank, Mizuho Financial
Group , Mizuho Securities in 2008 hired a team of
traders from Lehman Brothers’ Tokyo office after the U.S. bank
collapsed.

Efforts to build up the trading business, particularly a
high-frequency trading platform catering to hedge funds, have
faltered due to a conservative corporate culture and a
relatively unsophisticated technology infrastructure, according
to several sources who spoke to Reuters.

“The ex-Lehman guys underestimated the stiffness of the IT
department of Mizuho,” said one of the sources.

Mizuho Securities expects its Singapore operation to post a
pre-tax loss of $15.6 million in the year to end-March 2011, an
internal document dated March 22 shows.

Almost all of that is from the prime services business,
which showed costs of $13.7 million and zero profit for the
period.

The contents of the documents were corroborated by several
sources who spoke to Reuters on condition of anonymity.

A spokesman for Mizuho Securities, Yasunori Fukuda, declined
to comment.

“As confidence in competitors — such as investment banks —
returns, it is becoming harder to gain customers,” Mizuho said
in the documents.

“Without offering extremely low fees it is difficult to
bring in large, ultra-high frequency customers.”

HEFTY TECH COSTS

After hiring the Lehman traders in 2008, Mizuho shifted part
of their prime broking business to its office in One Raffles
Quay, Singapore.

Prime broking refers to a suite of services offered by
securities firms and banks, usually to hedge funds. Mizuho
invested about $100 million in Tokyo and another $50 million in
Singapore to develop the technology used in algorithmic trading
and to hire staff, one of the sources said.

Reuters first reported in 2009 problems with the ex-Lehman
team.

Outstanding IT-related costs at Mizuho’s Singapore operation
are estimated to be as much as 291.65 million yen ($3.4
million), according to the documents.

The brokerage plans to shoulder those costs to keep its
Singapore unit from breaching capital adequacy rules, the
documents showed.

“Cumulative losses at the PS (prime services) business have
eroded the financial base at MHSS (Mizuho Securities
Singapore),” Mizuho Securities said in the documents, adding
that the unit’s capital ratio would fall below 100 percent if no
action were taken.

“If we were forced to pull out of the business after losing
our licence … it would impact our reputation and draw concern
from regulators, including Japanese regulators. The costs of
leaving and then re-entering the business would have a
substantial negative impact,” it added.

The brokerage has shut the Singapore prime broking
business, where 13 staff are being laid off, the documents
showed. The Singapore office as a whole had 39 employees.

Mizuho has a history of trying to compete with Western banks
and losing out. In 2006 it took a group of structured credit
traders from French bank Calyon and then went to rack up massive
losses on subprime investments.

Parent company Mizuho Financial Group lost more than $6
billion on the subprime investments in the year to March 2008,
the most among Japan’s top banks.
($1 = 85.475 Japanese Yen)

(Additional reporting by Taro Fuse and Taiga Uranaka; Editing
by Nathan Layne and Muralikumar Anantharaman)

UPDATE 2-Mizuho shuts Singapore prime brokerage unit – documents