Japanese Banking System Outlook Raised to Stable by Moody’s

The outlook for Japanese banks led by Mitsubishi UFJ Financial Group Inc. was raised to stable from negative by Moody’s Investors Service, which cited prospects for modest economic growth and strong capital buffers.

“The revision was prompted by the stability evident in the banks’ operating environment, asset quality and capital, as well as funding and liquidity,” Moody’s said in a statement in Tokyo today. The change is the first since Moody’s assigned the negative outlook in 2008.

A retrenchment by global banks, particularly from Europe, has given Japanese lenders greater opportunities to expand loan books abroad, Moody’s said. Mitsubishi UFJ, Japan’s biggest banking group, had a common equity capital ratio of more than 9 percent at the end of June, surpassing its 8.5 percent requirement under the Basel III regime.

“Japan’s big banks are cautiously but surely increasing their loans overseas while managing to keep their bad loans at a minimal level,” said Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA. “Japanese megabanks still hold a prominent position compared with their European and U.S. rivals in Asia.”

Overseas loans expanded 26 percent to 16.6 trillion yen ($207 billion) as of March 31 from a year earlier, Mitsubishi UFJ said in an earnings statement on May 15. Deposits at its two banking units rose 0.3 percent to 118.7 trillion yen.

Capital Buffers

Japan’s three megabanks including Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. have “relatively strong” capital ratios, Moody’s said, citing the more than 4.5 trillion yen in funds raised from late 2008 to 2011.

Still, low interest rates at home are constraining growth in net interest income and the banks haven’t fully succeeded in boosting non-interest income to offset those declines, it said.

Japanese policy makers also remain willing to support troubled banks, Moody’s said. Holdings of Japanese government bonds pose a “low” risk to the banks, though a downgrade to the sovereign rating could negatively affect the lenders’ ratings, it said.

Moody’s said it has a stable outlook on all except one of the 35 Japanese banks it covers. That lender has a negative outlook.

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