Japan Loan Streak Pits Deutsche Bank Against Fitch Ratings
Japanese megabanks’ longest streak of loan growth in four years has been “phenomenal,” according to Deutsche Bank AG. Not so fast, says Fitch Ratings Ltd.
“Japan hasn’t been in such a bright spot in a long while,” said Deutsche Bank analyst Yoshinobu Yamada, who has covered the nation’s lenders for 18 years. Mizuho Financial Group Inc. (8411) raised its domestic loan growth forecast by 33 percent to 4 trillion yen ($40 billion) last week.
Central bank figures show lending by major banks climbed for nine months and increased 1.9 percent in August, the most since May 2009, adding to signs that Prime Minister Shinzo Abe’s efforts to end deflation and bolster the economy are taking hold, according to Yamada. Japanese stocks are headed for their best performance in eight years as Tokyo’s winning 2020 Olympics bid further stokes optimism.
Chikako Horiuchi at Fitch isn’t convinced that Abe’s policies will sustain the credit recovery.
“It’s too early to say that banks’ domestic lending has turned around,” said the Hong Kong-based analyst. “It will take at least two years for the impact of Abenomics to be proven.”
Bank of Japan Governor Haruhiko Kuroda, who unveiled unprecedented monetary stimulus in April to achieve 2 percent inflation, has said lower interest rates make it cheaper to borrow and the central bank’s asset purchases will prompt lenders to shift from owning government bonds to riskier assets including loans.
Over the past 15 years, falling prices and five recessions dissuaded companies from borrowing.
Combined outstanding lending at so-called city banks including Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho climbed to 198.4 trillion yen in August from 194.8 trillion yen a year earlier, the lowest level since the central bank began compiling the data in 1991.
Loans have shrunk from a high of 349.3 trillion yen in March 1996, when banks were still dishing out credit after the country’s asset bubble burst. Since then, they fell an average 3 percent a year as households and companies pared debts amassed in the boom era. In the revival since December, monthly gains in lending from a year earlier averaged 1.3 percent.
That’s not enough for Takehito Yamanaka, an analyst at Credit Suisse Group AG, who says loans must grow 3 percent for a year before Abe’s policies can be seen as effective.
“The pace of lending increase needs to be faster than it is now,” Tokyo-based Yamanaka said. “It’s important to see loans growing across a range of industry sectors to confirm an economic recovery.”
Japanese companies continue to save rather than spend, even as Abe seeks to encourage business investment with his three-pronged strategy of fiscal spending, monetary easing and business deregulation.
Machinery orders, an indicator of future corporate investment, unexpectedly failed to rise in July from a month earlier, Cabinet Office figures showed Sept. 12. Capital spending (JNVNYOYS) was unchanged in the second quarter after dropping in the first, the Finance Ministry reported this month.
Companies’ cash stockpiles rose 5.1 percent to 148.5 trillion yen in the same period, an amount almost equal to Australia’s economy, the data show. Bank deposits exceeded loans by 184.2 trillion yen in August, close to a record 189.1 trillion yen in June, according to Bank of Japan statistics.
The recent rebound in lending is largely attributable to “ad hoc demand” for funds used in mergers and acquisitions and financing for utilities that aren’t able to issue bonds, said Shinichi Tamura, a Tokyo-based analyst at Barclays.
“Abenomics hasn’t changed Japanese companies’ financial behavior at all,” Tamura said. “There are more companies that amass cash than those that borrow.”
A stock market rally boosted profit from fee businesses at the three Tokyo-based megabanks in the fiscal first quarter. Combined net income at Mitsubishi UFJ, Sumitomo Mitsui and Mizuho surged 63 percent to 791.6 billion yen in the three months ended June, according to calculations based on their earnings statements.
The government and the Bank of Japan’s stimulus policies spurred a 13 percent decline in the yen against the dollar this year, bolstering exporters’ earnings and helping Japanese stocks become the best performers among major markets. The benchmark Topix Index (TPX) climbed 39 percent since Dec. 31, fueling investment trust sales at commercial lenders.
Shares of Mitsubishi UFJ, Japan’s biggest bank, rose 0.5 percent at 9:31 a.m. in Tokyo, extending this year’s advance to 40 percent. Sumitomo Mitsui, the second-largest lender by market value, climbed 0.6 percent and is up 56 percent in 2013. Mizuho was unchanged and has gained 39 percent this year.
Banks’ profits have increased “quite substantially, but as far as I can see, that’s almost entirely driven by the boom in the Tokyo stock market,” said David Marshall, an analyst at CreditSights Inc. in Singapore. “It’s not resulting from any material increase in their core business of lending in Japan.”
Falling interest margins are also a drag on loan income, Marshall said. Lending profitability has eroded as the central bank’s government bond purchases and competition for borrowers weigh on interest rates.
Mitsubishi UFJ’s loan margins, calculated by subtracting the deposit rate from the lending rate, fell to 1.05 percent in June from 1.16 percent a year earlier, company figures show. The equivalent measure for Sumitomo Mitsui slid 10 basis points, or 0.1 percentage point, to 1.4 percent and Mizuho’s dropped six basis points to 1.07 percent over the same period.
Tokyo’s successful bid to host the 2020 Olympics has made Deutsche Bank’s Yamada more confident about a lending revival. Brian Waterhouse, an analyst at CLSA Asia-Pacific Markets in Tokyo, is optimistic that the return of the summer games to the capital will bolster construction and tourism.
Olympics-related expenditures such as those for sports venues and wages are projected at $3.41 billion, which will be covered by revenue from the games, according to the Tokyo 2020 Bid Committee’s website. The governments of Japan and Tokyo and private enterprises will shoulder the cost of projects to develop railways and roads, it said.
“The potential knock-on effect, or domino effect, for the domestic economy is very large,” Waterhouse said by phone. “And because banks are so much a part of financing of domestic gross domestic product, it will indirectly benefit them.”
Mizuho expects the Olympics will provide a lending opportunity, especially because the Tokyo Metropolitan Government is a customer, according to materials presented at an investor conference on Sept. 10.
The bank, Japan’s third biggest by market value, said its domestic loan books will increase by 4 trillion yen by March 2016, up from 3 trillion yen previously estimated, thanks to the games and a pickup in spending by large corporates. Mizuho had 53.7 trillion yen in domestic loans as of March 31.
A lending revival is up to the banks as much as their customers, said Shinichi Ina, an analyst at UBS AG in Tokyo.
“Banks can’t expand loans if they stay passive, assuming that demand will increase along with the economic recovery,” Ina said. “They should broaden their borrower base and take risks.”
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