Banks Dumping JGBs as Only Peripheral Europe Bonds Do Worse: Japan Credit
Japan’s banks, which bought record amounts of government debt as demand for loans dropped, are selling the bonds for the first time this year as prices tumble.
Lenders trimmed Japanese government debt holdings to 142.2 trillion yen ($1.7 trillion) as of Oct. 31 from a record 143.2 trillion yen a month earlier, Bank of Japan data show. They added bonds in each of the previous nine months as loans outstanding fell 2.1 percent to 391.9 trillion yen, the lowest since May 2008. Government bonds lost 1.5 percent since Sept. 30, set for the worst quarter in seven years, indexes compiled by Bank of America Merrill Lynch show.
“Banks may make some changes to their strategies as declining bond prices trim trading profits,” said Yoshinobu Yamada, a Tokyo-based analyst at Deutsche Bank AG. Lending will extend its longest slump since 2005 as “the economic outlook is weak, companies are building reserves and avoiding capital spending, and manufacturing is hollowing out and moving abroad,” he said.
The double whammy means earnings at Japan’s biggest banks Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. will drop at least 4.3 percent, while profit will rise at U.S. rivals including JPMorgan Chase & Co. and Citigroup Inc., according to analysts surveyed by Bloomberg. Japan’s government bonds are performing worse this year than all but the European countries swept up in the sovereign debt crisis, among developed nations.
Shinya Matsumoto, a spokesman for Mitsubishi UFJ, said the bank regularly monitors all risk assets, declining to give details of transactions. Kyosuke Hattori, a spokesman for the banking unit of Sumitomo Mitsui, declined to comment, as did Masako Shiono, a spokeswoman for Mizuho. The companies are all based in Tokyo.
The biggest banks in the world’s second-largest economy sold a net 3 trillion yen of Japanese government bonds in November, excluding short-term securities, the Japan Securities Dealers Association reported on its website.
Investors in Japanese government bonds earned 3.3 percent in the first nine months of 2010, according to the Merrill indexes. The securities have since pared this year’s gain to 1.8 percent as of Dec. 20, ahead of only Ireland, Portugal, Spain and Italy among 20 developed nations tracked by the indexes. U.S. Treasuries returned 5.6 percent. Denmark’s debt climbed 8.4 percent to offer the largest profit.
“Banks may have sold more debt in November as part of a strategy to lock in decent profits out of bond sales and to counter sluggish lending demand,” said Takehito Yamanaka, a Tokyo-based analyst at MF Global FXA Securities Ltd. “Some might have started offering loans to companies with narrower lending margins to capture the largest pie in a shrinking market.”
The yield on Japan’s 10-year bonds jumped 22 basis points this quarter, the biggest increase since the second quarter of 2008. Ten-year yields, which declined 1 basis point to 1.15 percent as of 11:45 a.m. in Tokyo, will advance to 1.25 percent by the end of 2011, according to a Bloomberg survey of analysts.
Rising yields on Japanese government bonds and U.S. Treasuries may have an impact on banks’ earnings in the second half of the year ending March 31, Masayuki Oku, head of the Japanese Bankers Association, told reporters in Tokyo yesterday. Oku, who is also chairman of Sumitomo Mitsui, added that yields are unlikely to “change drastically.”
Bank lending fell for a 12th month in November, extending the worst streak since 2005, central bank figures show. Corporate demand for loans has slid for six quarters as businesses pare investments, according to a Bank of Japan survey of loan officers.
Loans outstanding at the 83 lenders in the Topix Banks Index declined 2.5 percent to 5.44 trillion yen on average in the year to Sept. 30. Capital spending for the 1,664 companies in the Topix Index shrank in the final three months of 2010, according to data compiled by Bloomberg.
Borrowing dwindled even after the Bank of Japan cut interest rates to virtually zero and started three credit programs totaling about 40 trillion yen to support the economy. Gross domestic product is likely to shrink this quarter for the first time in more than a year because of a stronger yen and deflation, according to a survey of 42 economists released Dec. 8 by the government-affiliated Economic Planning Association.
“The biggest challenge facing Japanese lenders now is how to improve their profitability,” central bank Deputy Governor Hirohide Yamaguchi said at a forum in Tokyo on Dec. 10.
Profit at Mitsubishi UFJ, the country’s largest bank, will decline 4.3 percent to 509 billion yen in the year starting April 1 from a projected 532 billion yen this fiscal year, according to the median estimate of six analysts surveyed by Bloomberg News over the past month. Sumitomo Mitsui’s net income will drop 24 percent to 410 billion yen and Mizuho’s will slip 26 percent to 368 billion yen, the estimates showed.
Mitsubishi UFJ’s two main banking units reported an average lending margin of 1.43 percent in the quarter ended Sept. 30, the lowest since March 2007. Interest rates on deposits stood at 0.13 percent, also the smallest since March 2007.
The cost to protect banks’ debt against default is rising this quarter even as prices decline on average for contracts covering the rest of the nation’s investment-grade borrowers.
Credit default swaps covering Mitsubishi UFJ’s subordinated bonds for five years climbed to 103 basis points yesterday, the most for almost five months, from 97 on Sept. 30, CMA prices show. Swaps on the subordinated debt of Mizuho Corporate Bank Ltd., a Mizuho unit, rose to 120 from 113.
Wall Street Profit
The Markit iTraxx Japan index of credit-default swaps on 50 investment-grade borrowers declined four basis points this quarter to 102. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to meet its obligations.
Wall Street’s biggest banks are poised to report their second-highest earnings ever this year, according to Bloomberg surveys of analysts. JPMorgan’s profit will climb 15 percent to $19 billion in 2011 and Citigroup earnings are projected to gain 26 percent to $14.6 billion, the surveys show.
Credit Suisse Group AG analyst Shinichi Ina downgraded Mizuho and Mitsubishi UFJ to “neutral” on Nov. 29, citing worsening bond-trading profits. Tokyo-based Ina kept Sumitomo Mitsui at “outperform,” estimating a higher return on equity than its peers next fiscal year.
Mitsubishi UFJ, Mizuho and Sumitomo Mitsui all raised their full-year profit forecasts in November, as trading gains and lower bad-loan costs in the first half made up for declining net interest income.
The Topix Banks Index has slid 2 percent this year, compared with a 0.1 percent increase in the benchmark Topix. Mitsubishi UFJ rose 1.4 percent at the 11 a.m. break in Tokyo, paring this year’s loss to 1.8 percent. Mizuho gained 2.7 percent, trimming its decline for 2010 to 6.6 percent. Sumitomo Mitsui added 1 percent, extending its gain to 11 percent.
In the U.S., the KBW Bank Index rose 20 percent this year, outpacing a 13 percent gain for Standard & Poor’s 500. Citigroup has climbed 43 percent, while JPMorgan fell 1.6 percent.
The BOJ, which held interest rates at between zero and 0.1 percent yesterday, has said it will keep them unchanged until inflation reaches 1 percent. Consumer prices excluding fresh food fell 0.6 percent in October from a year earlier.
Investors maintained bets the central bank won’t end the decade-long deflation that the government says is curbing economic growth. The difference between yields on five-year Japanese government notes and inflation-linked debt, a gauge of trader expectations for consumer prices, was minus 0.65 percentage point today. The five-year average is minus 1.11 percentage points.
The yen gained 11 percent against the dollar this year, reaching a 15-year high of 80.22 per dollar on Nov. 1. The currency traded at 83.81 as of 12:02 p.m. in Tokyo.
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