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Japan's biggest bank mulls cutting off risky overseas borrowers amid recession

Mitsubishi UFJ Financial Group Inc. may cut off loans to some risky and unprofitable overseas borrowers following a planned expanded review this fiscal year, an official said, amid rising loan loss risk as pandemic-induced recessions hit their markets abroad.

The largest Japanese bank by assets plans to review the credit profile of about 600 customers outside Japan in the fiscal year ending March 2021, up from about 500 in the previous fiscal year, an unnamed official from the bank told S&P Global Market Intelligence. The lender had severed ties with 100 non-Japanese borrowers after a review in the previous fiscal year, the official said.

"They [Japanese banks] have expanded into overseas markets since early 2010s to strengthen their operations such as lending, bond underwriting and investment banking," said Toyoki Sameshima, senior analyst at SBI Securities Co. "For now, though, they're trying to reduce exposure to risky businesses there."

The impending adoption of Basel III requirements on capital, which will start in 2023 for Japanese lenders, has also prompted banks to review their operations abroad to maintain proper leverage ratios and certain levels of reserve capital.

Japanese megabanks have been expanding abroad in a bid to hedge against ultralow interest rates and weak loan growth at home. But as their overseas markets such as Southeast Asia, the U.S. and Europe are hit by recession amid the pandemic, Japanese banks are now exposed to rising credit risk of their overseas portfolio.

MUFG expects this fiscal year's review to shrink its unprofitable overseas loans by "several hundred billions of [Japanese] yen," similar to the previous fiscal year, the official added.

The Nikkei first reported MUFG's latest client review June 11.

Increasing overseas exposure

In May, the bank said its overseas borrowers will likely account for more than half its expected loan-loss provisions of ¥450 billion in the current fiscal year. The amount, which includes ¥200 billion for coronavirus-hit companies at home and abroad, is more than double the ¥222.9 billion recorded in the previous fiscal year.

The higher credit cost reflects MUFG's increased overseas lending in recent years. The outstanding overseas lending of the group increased 3.5% to ¥44.4 trillion as of March-end from three fiscal years ago. That is compared with ¥65 trillion in domestic lending as of end-March, down 1.1% during the same period.

The return on equity of MUFG's overseas operations "has not been high enough," SBI's Sameshima said.

MUFG's global commercial banking showed a negative 17% ROE in the previous fiscal year. Its global corporate and investment banking operations, meanwhile, posted an 8% ROE in the previous fiscal year, compared with 12% for its domestic corporate banking.

The group's overall ROE dropped to 3.85% in the last fiscal year from 6.45% the fiscal year before. The bank has said it will miss the target ROE of 7%-8% previously set for the current fiscal year.

Some not scaling back

Meanwhile, two other megabanks Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. still plan to increase their overseas loan portfolios.

Sumitomo Mitsui Financial Group aims to grow its outstanding overseas lending by 5% by March 2023-end, the bank said in May. It also plans to cut ¥1.6 trillion of less profitable assets, including outstanding loans and investments, in and outside Japan during the same period.

Meanwhile, Mizuho plans to increase its overseas lending by a compound average growth rate of 4% from US$278.8 billion between March 2020 and March 2024, while keeping its domestic loan book little changed during the same period.

Sumitomo's outstanding overseas lending shot up about 23% over the past three years to US$275 billion in the last fiscal year. Of the total, the combined amount of lending in the U.S. and Asia accounted for more than one-third. Its domestic lending edged up 2.3% to ¥54.6 trillion during the same period.

Sumitomo raised loan provisions to ¥450 billion for the current fiscal year, almost triple the ¥170.6 billion a year ago. Of that, the credit cost set for the bank alone accounted for ¥290 billion, 40% of which is for non-Japanese customers.

As of June 23, US$1 was equivalent to ¥106.41.

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