Abenomics Seen Cutting Japan Bad-Loan Costs to 2006 Low

Japan’s biggest banks are projecting the lowest bad-loan charges in eight years as bankruptcies drop, reducing their bond risk by a third in the past year.

Credit costs including provisions at Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. will fall to a combined 65 billion yen ($650 million) in the year ending March, according to the companies’ earnings plans released last week. Nonperforming loans at Mitsubishi UFJ slid to 1.57 percent as of Sept. 30, the lowest in more than three years. By comparison, the ratio at JPMorgan Chase & Co. was 1.4 percent.

The cost of insuring the Tokyo-based lenders’ debt has extended declines since last week, when they raised their combined full-year net income target by 23 percent to 2.26 trillion yen. The improvement in asset quality may free up banks to increase the pace of lending growth, supporting an economic revival that’s been driven by Prime Minister Shinzo Abe’s fiscal and monetary stimulus policies, known as Abenomics.

“Credit costs and bad-loan ratios are likely to remain at low levels, which is a trend that we’ve never seen before,” said Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA. “What banks are expected do now is lend to riskier companies.”

Photographer: Tomohiro Ohsumi/Bloomberg

The Japanese national flag flies on a ferry as it moves past buildings in Tokyo. Japan’s financial firms cleaned up their loan books over the past 11 years after the collapse of an asset bubble saddled them with bad debts and forced some lenders to merge, creating the three so-called megabanks. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

The Japanese national flag flies on a ferry as it moves past buildings in Tokyo. Japan’s financial firms cleaned up their loan books over the past 11 years after the collapse of an asset bubble saddled them with bad debts and forced some lenders to merge, creating the three so-called megabanks.

Reduced Provisions

The banks reduced cash set aside for soured loans in the first half, resulting in a 142.4 billion-yen net reversal of credit costs, earnings reports showed last week. For the full year, Mitsubishi UFJ, Japan’s biggest bank, sees credit costs at 20 billion yen and Sumitomo Mitsui, the second largest by market value, targets 70 billion yen. Mizuho projects they will be reversed by 25 billion yen. If achieved, the combined amount would be the lowest since the year ended March 2006.

The drop “can be explained by upgrades of our clients’ loan ratings,” Mitsubishi UFJ President Nobuyuki Hirano said at a Nov. 14 briefing. “Abenomics brought about a significant improvement in business results and that’s spreading from large companies to midsized ones and then to small businesses.”

Confidence (JNTSMFG) at Japan’s largest manufacturers climbed to the highest in almost six years and small non-manufacturers became the least pessimistic since December 1991, the Bank of Japan’s Tankan survey showed last month. The economy grew an annualized 1.9 percent last quarter, a fourth straight expansion.

Fewer Bankruptcies

Corporate bankruptcies have declined for 12 months, the longest streak since 2011, Tokyo Shoko Research Ltd. data show. A total of 9,243 companies went out of business in the first 10 months of the year, on course to be the fewest since 1991.

“You can chalk up the improvements in the megabanks’ credit costs to Abenomics,” said Rie Nishihara, a Tokyo-based senior analyst at Mizuho (8411) Securities Co., a unit of Japan’s third-biggest bank by market value. Bad-loan expenses “are expected to stay at low levels in the second half, so banks may even be able to beat their new full-year profit forecasts.”

Japan’s financial firms cleaned up their loan books over the past 11 years after the collapse of an asset bubble saddled them with bad debts and forced some lenders to merge, creating the three so-called megabanks.

Non-performing loans soared to an unprecedented 43.2 trillion yen in March 2002, according to Financial Services Agency data. That’s more than the annual economic output of Austria. Provisions for bad debts peaked at 15.5 trillion yen in May 2000, Bank of Japan figures show. Lenders have pared reserves since then, setting aside 4.71 trillion yen as of August, close to a record-low 4.61 trillion yen in March.

Default Swaps

The average cost to insure bonds of the lending units of Japan’s three biggest banks fell to 74.6 basis points yesterday from 115.5 a year ago, according to data provider CMA.

Credit-default swaps declined because “the market has a positive view on their very good earnings,” said Toshihiro Uomoto, chief credit strategist at Nomura Securities Co., a unit of Japan’s biggest brokerage.

Banks’ borrowing costs are decreasing as benchmark interest rates drop. The weighted-average coupon on Mitsubishi UFJ’s bonds slid 60 basis points, or 0.6 percentage point, since December 2009 to 1.85 percent, data compiled by Bloomberg show. Sumitomo Mitsui (8316)’s coupon decreased 36 points to 1.98 percent and Mizuho’s slipped 25 points to 1.57 percent, the data show.

Japan’s benchmark 10-year government bond yield has fallen 18 1/2 basis points this year to 0.61 percent today as the BOJ doubled monthly JGB purchases to more than 7 trillion yen in April. The yen has weakened 13 percent in 2013, trading at 100.11 per dollar as of 4:06 p.m. in Tokyo.

Bankruptcies kept falling even after a moratorium on loan repayments expired in March. Japan introduced the relief in December 2009 to support small businesses by helping them defer repayments to lenders. It extended the aid twice as the record earthquake and tsunami in March 2011 weakened the economy.

“The moratorium had already helped reduce bankruptcies,” said BNP’s Sameshima. “On top of that, the economy itself has turned around to ease banks’ credit costs.”

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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