Megabanks’ $800 Billion Cash Pile Shows Abe Task: Japan Credit

Prime Minister Shinzo Abe has succeeded in wrestling down the yen and snapping a 15-year deflationary spiral. The challenge of spurring lending by the country’s cash-hoarding megabanks remains.

The nation’s three largest lenders increased their cash and deposits with other financial institutions 5.7 percent in the quarter to June to 82 trillion yen ($800 billion) from the previous three-month period, earnings data show. New loans by Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. fell 329 billion yen to 239.1 trillion yen.

Abe needs to spur lending after the world’s third-largest economy shrank at an annualized 6.8 percent in the second quarter due to an April sales-tax increase aimed at curbing the world’s biggest debt burden. While the banks can no longer park excess cash in sovereign debt amid expectations for higher yields, falling loan rates have narrowed the spread over deposit payments to levels that discourage extending credit, according to Moody’s Investors Service.

“The big three are at a turning point,” said Graeme Knowd, an associate managing director who oversees corporate and financial institutions at Moody’s in Tokyo, in an interview. “They haven’t really taken credit risk for a long time. If Abenomics works, they need to reorient the business model.”

Excess Cash

Deposits at Japanese financial institutions exceeded loans by 192.5 trillion yen last month, according to Bank of Japan data. The surplus reached a record high 194.2 trillion yen a month earlier.

Cash and funds held at lenders soared 47.4 trillion yen since March 2013, a month before the central bank introduced its stimulus program. Reserves at the BOJ in excess of the minimum requirement, which pay a 0.1 percent interest, rose 82.3 trillion yen in the period to 134.9 trillion yen as of Aug. 12.

Abe’s policies and the BOJ’s about 7 trillion yen in monthly sovereign bond buying succeeded in depreciating the yen more than 18 percent last year. The infusion also reduced borrowing costs in the country, forcing banks to charge lower interest.

New loan rates dropped to 0.779 percent in May, the least in BOJ data going back to 1993, before rising to 0.905 percent in June. The spread on what Mitsubishi UFJ charges for domestic loans over deposit interest rates fell to 0.96 percent in the first quarter, a record low.

Risk Averse

“Japan’s banking sector is a little bit unusual,” said David Marshall, a credit analyst at CreditSights Inc. in Singapore. “They’re more risk averse, only willing to take on what they see as the good quality clients and they have been reluctant to lend to weaker companies.”

While some companies in Japan are spending more on capital investments, their cash levels remain high and so it will take time before demand for bank loans increases, Tomoyuki Narita, a spokesman for Sumitomo Mitsui said in an e-mail. Mitsubishi UFJ’s spokesman Takafumi Miyamoto said the bank is actively seeking to engage borrowers.

“Although we continue to make efforts to increase lending, a real rebound in funding demand will take a little bit more time,” Mizuho spokeswoman Masako Shiono said in an e-mailed response to questions. “We are hopeful for a recovery in the fiscal second half starting in October.”

Lending in Japan increased to 414.7 trillion yen in July, the highest level since March 2003, according to data compiled by Bloomberg. The additional income from new loans still fell short of what the banks made on bonds and equities.

Bonds and Stocks

Sumitomo Mitsui increased interest income from loans by 7 billion yen in the most recent quarter from a year earlier, according to calculations by CreditSights. That compares with a 32.7 billion yen gain on equities and a 12 billion yen net gain on bonds.

Japan’s benchmark 10-year bonds yielded 0.5 percent as of 9:29 a.m. in Tokyo today, down 23.5 basis points this year. The Topix stock index has fallen 2.7 percent since Dec. 31, after a 52 percent gain in 2013.

Banks have also turned to more lucrative overseas markets to escape low rates at home. Mitsubishi UFJ boosted loans abroad by 8.4 trillion yen since March 2013, compared with a 1.3 trillion yen increase in corporate lending at home.

“The banks are basically on the sidelines until it becomes clearer what the outcome is going to be” of Abe’s policies, CreditSights’ Marshall said.

Before it's here, it's on the Bloomberg Terminal.