Fitch Ratings downgraded Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group — collectively known as Japan’s ‘megabanks’ — by one notch each at the end of last week, leaving their long-term foreign currency ratings at A-.
But Fitch still thinks the government is able to support its banks and acknowledged the easy access to capital the megabanks have, keeping their short-term F1 ratings in place. The three banks still have the credit quality to sell multi-billion dollar bonds, and should face little problem financing a move overseas.
But is that a wise move at this point? The benefits to Japanese banks of pushing into offshore markets appears obvious. Demand for loans in Japan is catatonic, and if the megabanks want to improve on the absurdly low margins they can earn in the domestic market, they need to look elsewhere.
But rising risks will always accompany rising returns, and now does not look like the best time for Japanese lenders to expand their lending into Europe or the US. That leaves Asia as the obvious candidate for expansion.
The move into Asia’s market is not a new phenomenon for Japanese banks, but it is picking up pace. The last time these banks announced results, in the middle of May, they revealed that lending overseas had jumped by an average of around 22% over the fiscal year, according to Moody’s, compared to a 3% rise the year before, and a 0.60% decline in domestic lending.
There’s always a catch
The megabanks have already established themselves as formidable players in the Asian loan market, and are proving increasingly willing to lend to Southeast Asia, as well as attempting to increase the project finance they are known for.
Some rivals complain that they are, indeed, too formidable: pushing pricing and fees too low, and being too willing to export the razor-sharp returns they are used to in their domestic market to the rest of Asia. But Japan’s lenders are facing a domestic client base that is just not hungry enough for loans. It should not come as a surprise that these banks make sure they win business when they turn offshore.
The problem is that this overseas expansion has come after a woeful first quarter in the Asian loan market, and attempting to grow your loan book significantly when volumes are falling is a certain way to be left with some questionable credits on your balance sheet.
Lending will not really help boost their capital markets businesses either. Bond and equity markets appear to offer few opportunities to Japanese banks. It is near impossible to push your way into either market overnight; the ability to win business and, more importantly, to realistically execute that business requires years.
Big-name hires can help speed things along — this is the strategy that the most expansive of Japanese banks, Nomura, has taken — but that requires a lot of investment. There is little sign that the megabanks are willing to take a near-term hit for the possibility of long-term gain.
This leaves Japan’s biggest banks walking a tightrope, caught between two strategies: sticking to a domestic market that offers increasingly depressing profits, or moving into overseas markets that are becoming increasingly volatile.
The three megabanks will all announce profits next week — Mitsubishi UFJ and Mizuho on July 31, Sumitomo the day before. They will be worth watching not just for the overseas lending numbers, but for these banks’ projections for the years ahead.
Megabank stocks have all fallen since the start of the financial year in April. But the profit announcements next week will give them an opportunity to reassure equity investors that teetering on a tightrope is not their long-term plan. They should seize the opportunity.