Rate hikes could hurt Japanese banks’ plan to target lower-rated US borrowers
Japan’s major banks face heightened credit risk in their U.S. lending business as rising interest rates and slowing economic growth could affect their plan to lend more to lower-rated borrowers.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. said in May they planned to increase their commission income by offering syndicated loans and related securitiesare at non-investment grade US companies over the next two years.
“They [Japanese banks] are competing to increase their presence in this region [syndicated loans] to achieve higher profits,” said Toyoki Sameshima, senior analyst at SBI Securities Co.. “Of course, they should face increasing risks.
Japanese banks have for years sought higher returns by lending and offering financial and wealth management services overseas, as their domestic business has been hurt by ultra-low interest rates and sluggish credit demand. . Such efforts had sometimes backfired in the past, including the sharp rise in the overall cost of credit Mitsubishi UFJ Financial Group, or MUFG, reported in the fiscal year ending March 2021 as overseas markets, such as Southeast Asia, the United States and Europe, were battered by recession following the pandemic.
Central bank warning
The Bank of Japan has warned of “various risks” faced by banks that have accelerated in the US market for syndicated loans for lower-quality companies.
“In order to develop a profitable activity, they [Japanese banks] are in the process of accelerating syndicated loans [in the U.S.]”, the central bank said in an April report. “It is increasingly important to note that they could face various risks associated with them.
As of September 2021, outstanding syndicated lower-quality corporate loans in the Americas for major Japanese banks reached $38 billion, or 21% of their total loan book in the United States, dBank of Japan ata showed. For the major Japanese banks, the balance was $183 billion, also 21% of their total US loan portfolio for the period.
Japanese banks were the primary managers of 15% of all US leveraged loan transactions in 2021, including lower-grade companies, compared to approximately 5% in 2012, according to the central bank.
“Such an alarming bell will not pull them [the Japanese banks] return [from the market]“, said Sameshima.
Banks forge ahead
MUFG aims to expand its share of wallet and ranking in the US syndicated loan and debt capital market to 12th in 2023 from 17th in 2021.
Mizuho Financial intends to pursue a “selective expansion” of lower-grade lending to the technology, telecommunications and healthcare sectors in the United States. , compared to 23% two years ago.
“Higher interest rates seem like a double-edged sword to us,” said a spokesperson for Mizuho Financial.
Leveraging its partnership with Jefferies Financial Group Inc., Sumitomo Mitsui Financial is seeking to strengthen its securitization business, including lower quality loans, in overseas markets. The company expects to generate operating profit of approximately ¥75 billion in the current fiscal year ending March 2023 of approximately ¥More than 50 billion the previous year.
The three banks increased their loans in the Americas to 33.932 billion yen combined as of March 31, compared to 27.188 billion yen in March 2018. During the same period, non-performing loans in the Americas increased from 277.55 billion yen to 309.81 billion yen.
“They [Japanese banks] cannot make profit without taking risk,” said Shunsuke Oshida, head of credit research at Manulife Investment Research Japan. “Now is the time for them to test their abilities to rise to the occasion.
As of June 7, 1 USD was equivalent to ¥131.67.