28 May, 2023
Japanese megabanks may see bad loan ratio rise amid high interest rates
By Yuzo Yamaguchi and Mohammad Taqi
Japan's three megabanks may face pressures on their asset quality as borrowers struggle to repay loans due to higher interest rates and slower global economic growth damps demand for credit.
"I forecast that [nonperforming loan] ratios [at the megabanks] will rise. Nominal GDP growth is slowing overseas while nominal interest rates overseas have yet to decline," said Michael Makdad, a senior analyst at Morningstar. "In Japan, default rates are rising slightly."
The ratio of nonperforming loans at Mitsubishi UFJ Financial Group Inc. (MUFG) rose to 1.43% at the end of March, the highest in at least five quarters, from 1.33% a year ago, according to data from S&P Global Market Intelligence. However, the nonperforming loan ratio at Sumitomo Mitsui Financial Group Inc. (SMFG) and Mizuho Financial Group Inc. declined, the data showed. SMFG's nonperforming loan ratio declined to 0.94% at the end of March, from 1.27% a year ago, while that at Mizuho fell to 1.21% from 1.33%.
Japanese banks were able to pass higher rates to their overseas customers, taking advantage of a series of rate hikes by the US Federal Reserve since March 2022. Deposit rates were slower to catch up, creating a favorable rate spread. However, the tighter monetary conditions could slow loans, though the lenders expect their overseas business to continue to drive earnings this year.
Strong demand
"Capital demand in the US is strong," SMFG CEO Jun Ohta said at an earnings press conference May 15. "But we want to take a controlled approach, keeping an eye on credit quality," Ohta said.
The real estate sector, which shoulders a heavy interest burden when rates increase, and leveraged-buyout financing, which uses the target company’s assets as collateral, could trouble banks amid rising interest rates, analysts said.
Banks began tightening commercial real estate lending standards in the first quarter of 2022. According to BofA Securities, 61% reported stricter standards as of the first quarter this year, citing senior loan officer surveys conducted by the Federal Reserve.
"We want to see if risks [from rising interest rates] will heighten further," Mizuho CEO Masahiro Kihara said at a separate May 15 press conference.
Overseas loans
The three megabanks' US-bound loans have shown robust growth. MUFG's outstanding US lending rose 52.9% year over year to ￥11.246 trillion in March, while its loans at home edged down 0.4% to ￥66.6 trillion during the same period, data from the bank showed.
SMFG expanded its stateside loans year over year by 25.5% to ￥9.486 trillion at the end of its fiscal 2023, while its domestic lending increased 5.4% to ￥61.087 trillion. Mizuho extended ￥10.68 trillion of loans to US customers, up 43.4%, while keeping its lending in Japan little changed at ￥54.6 trillion.
Still, executives at the megabanks are also concerned about the risks of more banks collapsing in the US, following a string of regional bank failures that have shaken the banking industry.
"We need to watch inflation and the rising interest rates," MUFG CEO Hironori Kamezawa said at a May 15 press conference.
As of April, the number of businesses in Japan that filed for bankruptcy hit 610 in a 13-month period, according to data from Tokyo Shoko Research.
As of May 26, US$1 was equivalent to ¥140.63.