Japan Megabanks Show Asia Depreciation Concern After Loan Binge

Updated on
  • Top three banks lent 22.7 trillion yen to Asia at March-end
  • Region comprised 9.3% of the assets of Mitsubishi UFJ

Japanese banks may be starting to regret their biggest increase in overseas lending in 30 years as Asian economies slump and currencies tumble.

Mitsubishi UFJ Financial Group Inc.’s assets in Asia excluding Japan made up 9.3 percent of the total as of March 31, the most in at least 10 years, according to its annual report filed in July. The nation’s biggest lender said depreciation could weaken the finances of borrowers. Overdue loans from the region at Sumitomo Mitsui Financial Group Inc. rose 77 percent while those at Mizuho Financial Group Inc. increased 24 percent in the year ended March 31.

“We have seen non-performing loans go up in the past three quarters,” said David Threadgold, a Tokyo-based analyst at Keefe, Bruyette & Woods, a boutique investment bank. “It’s reasonable to think we could go through another round of that.”

Japanese banks, which focused on expanding in emerging Asia as yields fell to record lows at home, are now exposed to some of the world’s worst-performing currencies. China’s yuan devaluation sparked a selloff that sent the Malaysian ringgit and the Indonesian rupiah to their lowest levels since a regional financial crisis in 1998 and prompted the sharpest jump in default risk in Asia this year.

Asia has been a big focus for the expansion of the three banks. Their loans to the region hit 22.7 trillion yen ($189 billion) at the end of March, the highest in at least a decade, according to their annual reports. 

Mitsubishi UFJ alone increased its assets, which include other exposures aside from loans, by 17.4 percent in the year ended March 31 to 26.2 trillion yen.

Global Growth

The growth has happened across the globe. Lending and investments by Japanese firms rose to $3.53 trillion in March, the most since at least 1983, according to Bank for International Settlements data.

Nine major Japanese banks loaned over 60 trillion yen through overseas branches in the fiscal year ended March 31, double the amount five years earlier, Bloomberg Intelligence senior analyst Francis Chan wrote in a report.

Foreign loans have become a drag on the balance sheets of megabanks in the past nine months as they increased provisions for losses in advances made from Sydney to Jakarta, said Threadgold at Keefe, Bruyette & Woods.

Mizuho’s overseas business model is relatively resilient against downside risks because its clients are mainly high-quality non-Japanese corporations and it has a strong loan risk management system, said Masako Shiono, a spokeswoman in Tokyo.

Sumitomo Mitsui said by e-mail that doing localized business while monitoring the economic environment will help lead to growth in the mid- to long-term. Mitsubishi UFJ spokesmen weren’t immediately available to comment.

Asia Downgrades

Asia is especially of concern. Moody’s Investors Service made 63 downgrades in the region, excluding Japan, and only upgraded 13 times this year, amid a drop in raw material prices. The Bloomberg Commodity Index closed at 85.14 on Aug. 26, the lowest since 1999.

“The issue are downgrades rather than actual failures of borrowers,” Threadgold said. “That would be reflected in the provisions in balance sheets.”

Mizuho’s ratio of non-accrual, past due and restructured loans to total loans increased to 1.43 percent at the end of March from 1.28 percent six months earlier, according to Bloomberg Intelligence. Its non-performing loan ratio was at 1.2 percent as of March 2015 compared with 1.21 percent a year earlier. Past-due advances in Asia increased by 8.6 billion yen.

Regional Profit

The region has also helped improve profits for the banks. Mitsubishi UFJ got 358.6 billion yen of net income, or 23 percent, from Asia in the year ended March 31.

And while the exposure to the region has increased fast, it still represents a small portion of their total lending, according to Naoki Morimura, a director at Fitch Ratings in Tokyo.

The slowest growth in China’s economy in 25 years could affect the profitability from Asia for the Japanese lenders.

“We have to be careful about potential indirect impact on the megabanks,” said Ryoji Yoshizawa, a director at Standard & Poor’s in Tokyo. “We are closely monitoring their risks and returns.”

(An earlier version of this story corrected SMFG’s loan figure.)