Japanese megabanks may slow building loss-absorption buffers amid market turmoil

Major Japanese banks may slow the pace of issuing total loss-absorbing capacity debt and wait for global financial conditions to improve, after they raised billions of dollars in capital via such instruments in February.

Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. raised nearly $9 billion through total loss-absorbing capacity (TLAC) debt in February, driving the total capital raised by Asia-Pacific banks in the month to $21.53 billion, according to data compiled by S&P Global Market Intelligence. That compared with $25.06 billion raised in the same month of 2022. The aggregate figures for Asia-Pacific banks include bonds, senior debt and preferred securities.

Japanese banks accounted for more than half of the total capital raised by the region's banks in February.

"Japanese banks could take a wait-and-see stance on [the issuance of] TLAC until widely spread concerns about the global financial markets settle," said Shunsuke Oshida, the head of credit research at Manulife Investment Research Japan.

Spooked investors

Credit Suisse Group AG's rescue by UBS Group AG that would wipe out the additional Tier 1 (AT1) bonds issued by the troubled Swiss lender is "possibly preventing Japanese banks from issuing TLAC in several months to come because TLAC and AT1 are similar debt put in bank capital," said Takahide Kiuchi, executive economist at Nomura Research Institute.

AT1 bonds came under the spotlight after Swiss authorities wrote off all CHF15.8 billion of Credit Suisse's AT1 capital instruments — debt which is converted to equity, or "bailed in," if a bank gets into trouble — as downside protection for UBS Group, which agreed to acquire the troubled lender in a CHF3 billion deal facilitated by the Swiss government.

The development may impact AT1 bonds in Asia-Pacific. S&P Global Ratings said it anticipates that Asia-Pacific banks' AT1 issuance will become more expensive after the Credit Suisse outcome. In addition, "for some, issuance will become more difficult," Ratings said in a March 24 report.

Mitsubishi UFJ Financial, which had a plan to issue AT1 securities after late-April, is now discussing with investors whether to go ahead because of the widening of the spread, a spokesman of the Japanese bank told Market Intelligence.

Sumitomo Mitsui Financial and Mizuho Financial did not respond to requests for comment.

The three Japanese megabanks also comfortably meet the Financial Stability Board's phase 2 requirement for TLAC, which became effective Jan. 1, 2022, said Michael Makdad, senior analyst at Morningstar. The board, tasked with ensuring global financial stability, requires global systemically important banks to hold a TLAC amount of 18% in terms of risk-weighted assets, or 6.75% of the leverage exposure measure.

So, "rather than needing to aggressively add more TLAC, [Japanese megabanks] need to replenish TLAC-eligible debt securities that mature with new issuance and add TLAC just to meet growth of [risk-weighted assets] and leverage exposure," Makdad said.

Foreign currency debt

In February, Asian banks raised more than 80% of their aggregate capital in foreign-currency denominated debt securities, with US dollar securities remaining the most preferred, according to Market Intelligence data. Analysts said the trend will continue.

"Despite the relative cost attractiveness of some domestic markets, banks with large funding plans will continue to access offshore markets," said Yves Shen, Natixis Corporate & Investment Banking's head of debt capital markets for Asia-Pacific. Tapping US dollar, euro and Australian dollar markets gives access to a diversified pool of investors and "can offer pricing arbitrage to issuers at different points in time," Shen said.

Elsewhere in the region, major banks in Australia and New Zealand, including ANZ Group Holdings Ltd. and Westpac Banking Corp., continued to tap capital markets in February, raising more than $3.83 billion via local- and foreign-currency debt instruments. ANZ Group and its subsidiaries raised about $2.25 billion in February. The capital-raising spree from Australian lenders in January and February came as they prepare to repay billions of dollars in COVID-19-era loans from the government.