Japan’s QE: bad for banks, good for DCM in Europe

Japanese banks are unlikely to enjoy any let-up from razor-thin net interest margins in 2019. This is worrying for their long-term sustainability, but it’s potentially a bonanza for DCM specialists in Europe and the US.

  • By Jasper Cox
  • 24 Jan 2019
Email a colleague
Request a PDF

The Bank of Japan met this week amid concerns about global growth and softer noises from the Federal Reserve. Within Japan, inflation metrics are dropping from an already low base.

So it was hardly unsurprising that governor Haruhiko Kuroda refused to take his foot off the gas when it came to Japan’s extreme quantitative easing policy, which involves low interest rates, ¥80bn of net bond purchases a year, and investing in companies’ shares through exchange-traded funds (ETF).

This is not good news for the country’s banks. As low rates feed into the economy, they slice off net interest margins (NIM), forcing banks into riskier activity.

This is often abroad but a lending scandal last year at Suruga Bank, which offered credit to domestic investors in failed housing projects, suggests it causes bad behaviour at home too.

Kuroda may eventually end what increasingly appears to be a quixotic target of 2% inflation, in part because central bankers have woken up to the threat to the financial system.

“If the Bank takes a long view, then the risks to the real economy from failing to curb the build-up of financial imbalances surely outweigh the threats that ditching negative rates and allowing a steeper yield curve pose in the short run,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics, ahead of this week’s meeting.

But a meaningful change is unlikely in the next few months. And it would not solve other challenges for the banking sector: oversaturation, and Japan’s ageing and declining population. The three Japanese megabanks — Mitsubishi UFJ FG, Mizuho FG and Sumitomo Mitsui FG — cannot escape these pressures any more than their smaller peers can.

“There are signs that the decline in domestic NIMs is bottoming out but the [mega]banks recognise that growth will be slow and that more competition is coming both from existing banks and potential fintech competitors,” said David Marshall of CreditSights in November.

Banks continue to be pushed for profit. So they go abroad. 

Global dollar assets on the books of the country’s lenders soared by 88% between 2007 and 2017, according to the Bank for International Settlements. In contrast, for European banks, they fell by 44%.

And Japanese lenders need to fund this overseas expansion somehow. To access other currencies, they borrow from the money markets and swap yen-denominated deposits, and have been looking to expand their overseas deposit base. There are questions over how reliable this sort of funding is during a shock.

They have also been issuing bonds in foreign currencies; already awash with liquidity in yen, dollar or euro funding is likely to be more useful.   

Last year Japanese banks issued $36.4bn equivalent of notes in foreign currencies, according to data from Dealogic, the biggest yearly amount on record. From 2016 to 2018, the total volume was higher than across 2001-2015.

Volumes in euros, at €3.75bn, were also higher in 2018 than in any previous year.

The megabanks dominate the bond deal flow; they issue debt to meet their targets for total loss absorbing capacity (TLAC) in euros and dollars.

The overall picture is worrying in the long-term. Moody’s warned last month of tightening liquidity in foreign currencies for the banks: it will be interesting to see how they cope.

But in the short-term, the challenges facing the sector appears to be boosting debt capital markets activity in foreign currencies. DCM specialists in Europe and the US can thank Kuroda for all his help in bringing financial issuers to their doorstep.

  • By Jasper Cox
  • 24 Jan 2019

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 163,028.47 711 8.04%
2 Citi 160,005.15 642 7.90%
3 Bank of America Merrill Lynch 132,268.74 528 6.53%
4 Barclays 127,185.71 494 6.28%
5 HSBC 106,407.22 534 5.25%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 12,912.95 35 6.60%
2 BNP Paribas 12,334.48 61 6.31%
3 UniCredit 11,196.47 58 5.73%
4 Citi 9,580.75 37 4.90%
5 Deutsche Bank 8,953.95 35 4.58%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 5,579.06 26 10.66%
2 JPMorgan 4,866.13 28 9.30%
3 Goldman Sachs 4,405.13 21 8.41%
4 Citi 3,774.81 24 7.21%
5 UBS 3,602.23 16 6.88%