Return-Starved Japanese Megabanks Boost Lending 25% in Australia

  • Australia's higher margins, benchmark rates act as a lure
  • Ramp-up comes as Australian business borrowing accelerates

Japan’s biggest banks are looking to get more bang for their buck Down Under, expanding loans in Australia 25 percent in the past year.

With interest rates near zero at home, Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are tapping into a developed economy that offers higher margins on loans than their domestic market and a benchmark cash rate of 2 percent. Their total loans outstanding in Australia grew to A$39.9 billion ($28.1 billion) as of Sept. 30.

While Australia’s economy is struggling to shift away from a reliance upon mining, there are signs that unprecedented central bank stimulus is having an effect and a sub-par growth rate of 2 percent looks robust in comparison to Japan. Sydney and Melbourne housing has been booming for some time, and that’s now being complemented by a gradual acceleration in business borrowing with overall private credit growth quickening to 6.7 percent, the fastest pace since 2008.

“The Japanese megabanks all want to increase lending abroad as part of their mid-term plan, and with the sharp slowdown in China, they need to look elsewhere,” said Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo. “Australia is relatively safe, so they’re making a particular effort there.”

The lift in Japanese lending over the past year compares with gross loan growth of just 9 percent across all banks operating in the South Pacific nation, according to Australian Prudential Regulation Authority data. It also represents a quickening from a year earlier, when Japanese loans in the country expanded by just 8 percent.

The market has lured other Asian lenders from countries including China and Singapore seeking returns in a nation with a top sovereign credit rating and historically strong governance. Lenders from the world’s second-largest economy including Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. have seen loans expand by 30 percent, albeit from a lower base.

Moody’s Investors Service warned last month that Japanese lenders’ pursuit of extra returns overseas could risk a worsening in their asset quality in the future as they extend credit to borrowers they are less familiar with and in emerging markets.

“Japanese banks are trying to expand in Australia after focusing mainly on Asia and the U.S. in the past,” said Rie Nishihara, a senior analyst at Mizuho Securities Co. “Unlike Asia, where there are concerns about an economic slowdown, Australia is a developed nation and it has the business cycle of a developed country.”

Higher Margin

One point of attraction for Japan’s banks is the higher margin available in Australia than at home. While competition has reduced the average net interest margin for Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. to 2.08 percent, that’s still more than double the 1.03 percent for the three Japanese megabanks, according to data compiled by Bloomberg.

The 15.16 percent average return on equity for Australia’s four pillar banks is also almost twice the 8.53 percent mean for the three Japanese lenders, the data show. Australia’s 10-year sovereign bonds yield 2.895 percent, compared with 0.335 percent for the equivalent rate in Japan.

Mitsubishi UFJ was one of the arrangers of a A$1 billion loan to the Royal North Shore Hospital Project in Sydney in February, according to data compiled by Bloomberg. Loans to infrastructure projects and new clients increased, with deals rising for both Japanese and non-Japanese borrowers and for project finance, said Taiki Kitaura, a spokesman at the Tokyo-based bank.

Interest Income

Sumitomo Mitsui’s loan balance in Australia has grown in the past five years because of increasing project finance deals and loans to major local companies, said bank spokesman Takafumi Sasaki. Mizuho is aiming to boost deals with Australian blue-chip companies, said bank spokeswoman Masako Shiono.

Tokyo Star Bank Ltd., owned by Taiwan’s CTBC Financial Holding Co., started real estate lending in Australia from March, and aims for 50 billion yen ($405 million) in loans in a year, according to Michiya Fujii, the head of the lender’s real estate finance group.

“We want to earn interest income in Australia that’s higher than in Japan, and lower our dependence on the Japanese real estate market,” Fujii said in an interview.

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