Japanese banks face volatility and offshore default risks in search of higher returns


As Japanese yield-hungry banks can lend or invest even more overseas after a record year of 2020, lenders face growing risk of defaults and market volatility in their growing overseas operations. , warn analysts.

Japanese financial institutions have a long history of generating interest income and growing assets from operations outside their home market, which has been hit by a prolonged period of low interest rates and low demand for credit. Risks from global exposures were brought to the fore again in early April, when Nomura Holdings Inc., Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. reported potential losses of around US $ 2.4 billion. combined that would have been linked to the fall of the United States. hedge fund Archegos Capital.

The Archegos saga, although not directly linked to the banks’ lending activities, is “the result of an accelerated allocation of funds to foreign markets, fueled by the low interest rates in the country”, he said. said Shingo Ide, chief equities strategist at the NLI Research Institute.

At the end of 2020, outstanding loans and overseas investments of Japanese banks with offshore assets of over 100 billion yen each reached a record high of $ 4.851 billion, up 9% from the previous year, the largest increase in more than four years, according to the Bank of Japan, which cited an analysis by the Bank for International Settlements in March.

Almost half of the $ 4.851 trillion that Japanese banks funded or invested at the end of 2020 was for the United States, while 23% of that was allocated to Europe and 9% to Asia. Pacific, according to BOJ data.

According to a Japanese government official, who asked not to be named, much of the growth in overseas investment has come from sovereign bonds, asset-backed securities and mutual funds.

U.S. corporate bankruptcies peaked almost in a decade in 2020 as the pandemic disrupted global industries and struggling businesses faced their breaking points.

“Some loan risks are there for them [Japanese banks] – default risk, credit risk and market risk “because they allocate more funds to foreign markets, said Nana Otsuki, chief analyst at Monex Inc.” [Japanese banks] will incur a loss due to market volatility in the United States and Europe. “

Attract returns abroad

Despite the risks, Japanese banks are unlikely to slow down their overseas lending and investment due to strong demand for liquidity, analysts say.

Japanese banks are “building win-win relationships” with foreign companies seeking liquidity, Otsuki said. “This move could become a trend, given the recovery of economies after the pandemic and persistently low interest rates here. [in Japan]. “

Deposits are piling up in Japanese and regional mega banks as domestic consumption slows amid the protracted pandemic, providing a war chest to lend or invest in higher-yielding assets. The average outstanding amount of all Japanese banks in December 2020 was 5.77 trillion yen, up from 5.46 trillion yen in March of the same year when the coronavirus epidemic in Japan began.

Otsuki expects the United States to remain the top destination for Japanese banks’ loans and foreign investments.

As of April 15, Japanese 10-year government bond yields stood at 0.085%, compared to 1.639% for US Treasuries, 1.743% for Australia and 6.011% for India of the same maturity.

The U.S. economy, for example, is expected to grow 6.5 percent in 2021, surpassing an estimated 5.6 percent growth in the global economy, according to the Organization for Economic Co-operation and Development. The OECD expects Europe’s GDP to grow 3.9% this year, above 2.7% for Japan.

Bumpy road outside of Japan

While loan and investment returns are generally higher outside of Japan, they do not always translate directly into better performance for Japanese financial institutions.

MUFG’s record level of NPLs at the end of the December 2020 quarter is a case in point.

During the quarter, the mega-bank’s total NPL stood at 575 billion yen and its NPL ratio hit a three-year high of 1.17%. It was largely due to defaults in pandemic-stricken Southeast Asia, particularly in Thailand, where the bank has a 76.88% stake in a local lander Bank of Ayudhya PCL.

Japan’s largest bank had set aside 62% of its loan loss provisions for its overseas loans in the first three fiscal quarters ended December 31, 2020. At the end of 2020, MUFG granted 38 500 billion yen in loans outside of Japan, or 36% of its total loan portfolio.

In addition, the declining valuation of MUFG’s stake in the Thai bank, as well as its 92.47% stake in PT Bank Danamon Indonesia Tbk of Indonesia and a 20% stake in Security Bank Corp. of the Philippines had led the Japanese lender to reserve on the United States. $ 3.34 billion in impairment losses for the fiscal year ended March 31, 2020.

“Unless the interest rate differential between Japan and other countries narrows, they [Japanese banks] “would continue to allocate money to foreign markets,” said Hajime Takata, executive economist at the Okasan Research Center. “The risks are everywhere, however.”

As of April 14, US $ 1 is equivalent to ¥ 108.97.

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