The coronavirus pandemic threatens to force Japan’s large regional banking sector to regret aggressive overseas investments and purchase loans during its four-year battle with negative interest rates.
Analysts estimate that about 70 of the regional lenders listed are more vulnerable to rising credit costs than the country’s mega banks, as they are already under heavy pressure due to the demographic and economic decline of much of the country.
As regional lenders enter the 30-day period before mid-May annual results – the period in which they must submit any major revisions to the Tokyo Stock Exchange – Moody’s has warned that they are vulnerable to asset losses, even minor, quality because their cushions against loss are so thin.
“Fierce competition drives down loan yields, even if banks take more risks, making them vulnerable to rising credit costs,” said Tomoya Suzuki, analyst at Moody. Average capital adequacy ratios across the sector have fallen to less than 10%, he said.
Regional banks held more than $ 3 billion in assets at the end of last year, more than the entire Italian banking system.
One of the biggest threats to profits is the potentially high loss of value on foreign securities. Regional lenders have been aggressively accumulating these assets since 2016, as the Bank of Japan’s negative interest rate policy led to a global hunt for yield.
It could also have created a hidden risk spread in the sector, according to Brian Waterhouse, banking analyst at Windamee Research. Small lenders lacking the courage or the expertise to invest overseas stakes bought in regional peers who have done so in the hope of benefiting from the dividend, he said.
The recent capitulation to world markets due to the coronavirus pandemic is expected to hit Japanese regional banks hard, he added, many of whom have turned to alternative investments abroad, particularly in real estate and investment trusts in the United States.
“Many are teetering on the edge of loss. I would expect a flurry of downgrades from Japanese regional banks, “said Mr. Waterhouse.
The sector also took a solid lead in a mortgage lending boom, which lifted the system-wide mortgage loan balance in Japan to 81 billion yen ($ 750 billion) last year – a higher level. to that of the bubble of the 80s.
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Since 2013, regional banks in Japan have used various methods to improve their appearance of health, analysts said. Regulators gave them flexibility to cancel their loan loss provisions to reflect the strength of the economy, and they sold assets in their large securities portfolios. In 2018, 23% of ordinary profits of regional banks came from equity gains.
Concerns over the regional banking sector increased before the BoJ’s semi-annual report on the state of the country’s financial system, which is expected to be released later this month.
the latest report, released in October, warned that increasingly aggressive foreign investment by major Japanese banks had made the country’s financial system “more vulnerable to the effects of foreign financial cycles”.
Morgan Stanley MUFG’s Mia Nagasaka said that in an environment of falling interest rates and rising credit costs, regional banks’ net income could fall 20% in the fiscal year starting April 1 .
“The biggest downside risk in the Japanese financial sectors under our coverage is for regional banks,” she said.