Yen Drop Erodes Japan Banks’ Advantage on Overseas RisksFinbarr Flynn, Shingo Kawamoto and Monami Yui
The yen’s 20 percent depreciation since the end of 2012 has seen Japanese banks’ balance-sheet superiority against overseas competitors vanish.
Mitsubishi UFJ Financial Group Inc., Japan’s largest lender, has an adjusted core capital ratio of 9.4 percent, as the size of its overseas risk assets swelled, below the 11.5 percent for Deutsche Bank AG and 10.5 percent for Citigroup Inc., according to Bank of America Merrill Lynch calculations. The prices of subordinated U.S. dollar bonds sold by Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. that count as capital fell to three-month lows last week.
“The financial strength of Japanese banks that people used to talk about has all of a sudden disappeared on a relative basis,” said Nana Otsuki, a banking analyst at Bank of America Corp. “Their capital ratios haven’t expanded at the rate you’d expect given their accumulated retained earnings.”
Mitsubishi UFJ’s outstanding overseas loans increased 68 percent to 33.86 trillion yen ($311 billion) from September 2012 to June this year, as Prime Minister Shinzo Abe’s unprecedented monetary stimulus program sparked a tumble in the yen. Similar expansion by Japanese peers, combined with a weakening currency, has swelled their exposure to loans abroad at a time when the domestic economic recovery is flagging.
Mizuho has an adjusted common equity Tier 1 ratio of 8 percent and Sumitomo Mitsui 9.3 percent as of June, based on tougher regulatory requirements to apply fully as of 2019, according to Bank of America calculations. The data strip out unrealized gains from investments such as shareholdings, which are liable to large fluctuations though allowed in the capital calculations, data from the U.S. lender show.
Common equity Tier 1 capital ratio, a key solvency measure under Basel III rules, is the percentage of a bank’s capital including primarily its ordinary shares and retained earnings to its risk-weighted assets.
Mitsubishi UFJ is ready to spend about 800 billion yen on acquisitions in the U.S. and Asia, the Financial Times reported earlier this month, citing an interview with Deputy President Masaaki Tanaka. Mitsubishi UFJ, Mizuho and Sumitomo Mitsui now get about a third of their profit from abroad, where they increased loans and spent at least $14 billion on acquisitions over the past five years.
“A lot of people think these banks have got lots of excess capital, and MUFG have talked about making this $8 billion acquisition in the U.S., but it isn’t obvious to me how they can do that,” said David Marshall, a credit analyst at CreditSights Inc. in Singapore. “They still can grow but I am not so sure they are so strongly placed to make really major acquisitions unless they raise some more capital.”
The renewed decline in the yen is a “mixed picture” for the banks as it also increases the value of overseas earnings, according to Marshall. Mitsubishi UFJ spent $5 billion to purchase Thailand’s Bank of Ayudhya Pcl in 2013, helping boost overseas revenue to 1.65 trillion yen that year, a 26 percent gain from the previous year.
Nobuyuki Hirano, the chief executive officer of Mitsubishi UFJ and chairman of the Japanese Bankers Association, said Sept. 18 that his bank seeks to hedge overseas investments so they don’t affect its capital ratio. The good and bad effects of the weak yen will be different for each bank, he said.
Mitsubishi UFJ had an overall capital ratio of 15.53 percent at the end of its financial year in March, compared with 14.91 percent two years earlier. Sumitomo Mitsui’s ratio was 15.51 percent in March, down from 16.93 percent two years earlier, according to the bank. Zurich-based UBS AG’s total capital ratio rose to 22.2 percent at the end of last year, up five percentage points from the end of 2011, according to data compiled by Bloomberg.
Sumitomo Mitsui, which bought Royal Bank of Scotland Group Plc’s aviation division in 2012 for $7.3 billion, has boosted overseas loans by 23 percent in dollar terms to $175 billion as of June from before Abe’s term began, while Mizuho has increased that number by about 20 percent to $161.5 billion, reports by the companies show. Sumitomo Mitsui is Japan’s No. 2 bank by market value and Mizuho is the third-biggest lender.
Overseas lending made up 33 percent of Mitsubishi UFJ’s total loans compared with 24 percent in 2012. The bank, Mizuho and Sumitomo Mitsui are all rated A by Standard & Poor’s, its fifth-lowest investment grade and one level lower than HSBC Holdings Inc. Moody’s Investors Service rates Mitsubishi UFJ and HSBC’s largest bank units both at Aa3, its fourth-highest score.
“I wouldn’t call it a front-burner concern, it is probably a back-burner concern,” said Oliver Boulind, head of global credit at Aberdeen Asset Management Plc in London, on the impact of the weaker yen on megabanks’ capital ratios. “They will either have to build capital to support the overseas book or change the dynamic of the overseas book such that it compensates for the FX effect.”
The price of Mizuho’s 4.6 percent, Basel III-compliant bonds due 2024 dropped to 103.3 on Sept. 19, its lowest since June 13, according to data compiled by Bloomberg. Sumitomo Mitsui’s comparable 4.436 percent notes fell to 102.7 the same day, a three-month low.
Japan’s benchmark 10-year yield has fallen 22 basis points this year to 0.515 percent, as the central bank buys about 7 trillion yen of sovereign notes a month to spur inflation. The yen was at 108.96 per dollar as of 11:41 a.m. in Tokyo. A basis point is 0.01 percentage point.
UBS revised its forecast this month for the yen to fall to 115 against the dollar in the next 12 months from 107. The median estimate is for the Japanese currency to weaken to 111 next year, according to data compiled by Bloomberg.
“Anything translated back into yen now, positive or negative, has a bigger impact,” said Graeme Knowd, an associate managing director who oversees corporate and financial institutions at Moody’s in Tokyo. The megabanks “are adequately capitalized but the question is do they have enough capital to go out and add risk? They don’t have a lot of excess.”