Japanese megabanks are facing weakening credit quality of domestic borrowers, in addition to lingering default risk of their overseas operations, after reporting the highest nonperforming loan ratios in more than three years for the March-end quarter.
Mitsubishi UFJ Financial Group Inc., or MUFG, which derives more income from lending outside Japan than the two other megabanks, reported the highest NPL ratio among the trio in the fiscal fourth quarter ended March 31. Its bad loan ratio stood at 1.25%, the highest since the October-December quarter in 2017, and up from 1.00% a year earlier, according to data from S&P Global Market Intelligence.
However, Sumitomo Mitsui Financial Group Inc., which analysts say is most exposed to domestic credit card and consumer finance businesses, reported the biggest year-over-year increase for its bad loan ratio among the megabanks. Its fiscal fourth quarter NPL ratio rose to 1.14%, the highest since the January-March quarter of 2017, up 35 basis points from 0.79% a year earlier. Mizuho Financial Group Inc. saw its NPL ratio increase to 1.01%, the highest since the April-June quarter of 2017, from 0.84% in the prior-year period.
“I am concerned because it is not just a rise in the NPL ratio overseas, it also seems to have turned domestically,” Michael Makdad, an analyst at Morningstar, said. “Some of the loan restructuring [that involves] lowering interest rates and extending maturities is surely related to the pandemic and business closures during emergencies.”
Japan’s central government had declared three states of emergency since the pandemic started last year, which led the IMF to expect the nation to be among the slowest-growing developed economies in 2021 and 2022. Although corporate bankruptcies in Japan have been trending down in recent months, analysts said that could partly be due to the government’s supporting measures for vulnerable businesses, many of which are facing growing closures risks if the pandemic lingers.
In addition to domestic challenges, Japanese megabanks are also bracing for the long tail for recovery in some of their key overseas markets, such as the U.S. and Southeast Asia.
In the fiscal fourth quarter, MUFG remained the most exposed to potential loan defaults outside Japan. Its overseas loan book stood at about $360 billion at the end of March 2021, compared with $268 billion for Sumitomo Mitsui and $264 billion for Mizuho.
Elevated provisions
While all three megabanks have set aside lower loan-loss provisions, or credit costs as they are known in Japan, for the current fiscal year ending March 2022 compared with the previous fiscal year, the buffers for potential defaults are still higher than pre-pandemic levels.
MUFG, for instance, plans to slash loan-loss provisions for the current fiscal year to ¥350 billion from ¥515.5 billion in the previous fiscal year. However, it will still be higher than the ¥222.9 billion of provisions in the fiscal year ended March 2020, before the pandemic spread to most parts of Japan.
“The banks’ credit costs are still high, meaning they’re bracing for default risks,” said Toyoki Sameshima, a senior analyst at SBI Securities Co. “I won’t rule out a possibility that nonperforming loan ratios will rise further.”
Cautious margin outlook
All three megabanks showed quarter-over-quarter growth in net interest margins for the January-March quarter, the first time in a year. However, on a year-over-year basis, MUFG’s margin was still lower, while Mizuho’s margin reported the biggest increase.
The recovery of NIM, a key profitability metric, from the previous quarter was largely due to higher interest rates the banks charged ailing businesses thanks to government subsidies to those borrowers, analysts say.
“What would happen to their margins in future?” Sameshima said. “They could become flat for larger banks as it’s uncertain whether demand for new loans will rise further as pressure from low interest rates [on lenders] remains strong.”
Japan’s economy is forecast to grow 3.3% in 2021 and 2.5% in 2022, the lowest among developed countries, according to data from the IMF. The estimates for the world’s third-largest economy are below the projections of 6.0% and 4.4% for global economic growth in the next two years.
“Obviously, their default risks will continue to rise if the government ends financial support [for struggling businesses]," Takahide Kiuchi, executive economist at Nomura Research Institute, said. “If that is the case, their higher [net interest] margins could also be short-lived.”
As of May 21, US$1 was equivalent to ¥108.95.