Sumitomo Mitsui likely to face headwinds in foray into US digital lending

Sumitomo Mitsui Financial Group Inc. faces a tough battle as it seeks higher returns from breaking into the U.S. digital lending market.

Japan's second largest bank by assets will be entering a market where high inflation, rising borrowing costs and recessionary pressures have already hit consumer spending, analysts said. Sumitomo Mitsui Financial will also be competing against major homegrown digital lenders, such as SoFi Technologies Inc. and LendingClub Corp., which have an established market share and cost advantages, analysts added.

It could take several years for Sumitomo Mitsui Financial's new venture in the U.S. to become profitable, as credit costs may be high at the beginning due to economic uncertainties, said Chizuru Tateno, a credit analyst at S&P Global Ratings Japan.

Japanese megabanks for years have been seeking higher returns from offering loans and financial services overseas while their domestic business suffers from ultra-low interest rates and sluggish credit demand.

The gap in interest rates between the U.S. and Japan prompted Sumitomo Mitsui Financial to embark on a go-stateside strategy, as higher U.S. interest rates would offer higher loan yields for banks, analysts said.

"We'll grope our way forward," a Sumitomo Mitsui Financial spokesperson said. "But we'll go with bigger [gross domestic product] growth in the U.S."

Looking abroad

Sumitomo Mitsui Financial's planned foray into the U.S. digital lending space is the latest in a series of investments in and outside Japan. Such deals include a $2 billion acquisition of an unprofitable nonbank lender in India, a $386 million minority stake purchase in U.S. investment bank Jefferies Financial Group Inc. in 2021 and an acquisition of a 10% stake in SBI Holdings Inc., a Japanese online brokerage, earlier in 2022.

Sumitomo Mitsui Financial's outstanding overseas loans totaled $295 billion as of June 30, up 14% year over year. That included $114 billion in the Americas, which rose 20% year over year and made up the largest portion of overseas loans. The group's overseas loan book for the period was smaller than that of larger peer Mitsubishi UFJ Financial Group Inc., which posted overseas loans of ￥47.645 trillion.

The Japanese megabank looks to launch its new digital banking unit, Jenius Bank, as a division of Manufacturers Bank, a California state-chartered bank that is a wholly owned subsidiary of the group's core banking unit, Sumitomo Mitsui Banking Corp. The group intends to provide loans to individuals in their mid-20s to mid-40s with an annual income of $100,000 or more. The new bank will launch with personal loans and then expand its offerings with savings and checking products within its first year.

To appeal to such targets, the Japanese lender intends to offer lower-rate loans and higher-rate deposits than its rivals through internet banking, the Sumitomo Mitsui Financial spokesperson said. For this, it already invested an additional $150 million in Manufacturers Bank in December 2021, leaving the U.S. bank with a total capital of $231 million.

"The point of internet banking is to offer competitive loans to customers as there is growth potential in the U.S. market," said Hiroshi Kubotani, a senior economist at NLI Research Institute who specializes in the U.S. economy.

Sumitomo Mitsui Financial's move is in contrast with Mitsubishi UFJ Financial, which has also expanded aggressively globally but is in the process of selling off its U.S. retail banking arm to cut costs and stabilize risk assets.

"[Sumitomo Mitsui Financial]'s stance is to take the risk to step out, not to stand still," said Toyoki Sameshima, a senior analyst at SBI Securities Co.

Competitive market

Loan growth at personal-focused digital lenders in the U.S. has been robust in recent years, with multiple lenders in the sector expanding volumes by more than 100% year over year in 2021, according to Market Intelligence's 2022 U.S. Digital Lending Market Report released in February. Growth in loan origination for such lenders is expected at 17% annually through 2025.

LendingClub, which posted a 139% year-over-year increase in loan origination in 2021, is increasingly funding loans with its own balance sheet, while digital lender Upstart is refining its underwriting process by automating its loan approval capabilities, the report said. Such moves will likely help contain their cost of funding and operations.

High inflation and recessionary pressures would tighten the strings of U.S. consumers' purses, forcing Sumitomo Mitsui Financial to compete on interest rates, said NLI Research's Kubotani.

The interest rates raised by the Federal Reserve could increase funding costs for digital loans, potentially impacting loan demand. Loan yields on digital lender products, particularly personal and small- and midsize enterprise-focused loans, can be quite high, often in the double digits, implying that customers may not be as rate sensitive as others, analysts said.

Collecting deposits from U.S. individuals would also help diversify Sumitomo Mitsui Financial's dollar funding and reduce risk. The lender's foreign currency deposits stood at $235 billion as of June 30, down from $244 billion in the prior-year period, covering less than 80% of its total overseas lending.

As of Oct. 17, US$1 was equivalent to ￥148.76.