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Japanese megabanks, headquartered in Tokyo, could be hit by their direct loan exposure in Russia as international sanctions ratchet up. |
Japanese megabanks may need to set aside additional reserves for or write off some of their outstanding loans in Russia where sanctions are ratcheting up, adding to increasing pressure on credit costs.
Mitsubishi UFJ Financial Group Inc., or MUFG, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc.
The direct loan exposure to Russia of all three megabanks totaled about US$4 billion as of Sept. 30, 2021, according to the latest data available. The exposure is equivalent to about 20% of the lenders' own estimated net profit of ¥2.250 trillion combined for the current fiscal year even though it is only about 0.06% of their combined total assets.
"If the borrowers are Russian companies, they will potentially default on most of those loans," Takahide Kiuchi, executive economist at Nomura Research Institute, said.
All megabanks declined to comment on the credit quality of their loans in Russia and their provision policy when contacted by S&P Global Market Intelligence.
Japan, the only Asian member of the Group of Seven advanced economies, joined international sanctions on Russia following the invasion of Ukraine. Financial sanctions by Tokyo include limiting transactions with the Russian central bank, freezing assets of Russian officials, as well as tightening restrictions on exports of semiconductors and other technologies to Russia.
Potential losses associated with the exposure to Russia are adding to growing pressure on credit costs for the biggest lenders in Japan, which is struggling with post-pandemic recovery and rising borrowing costs.
The Japanese economy — the world's third largest — is expected to grow 3.3% in 2022, lower than the 4.4% growth for the global economy, according to an estimate by the International Monetary Fund. The country's economy likely expanded 1.6% in 2021, following a 4.8% contraction in 2020, according to the IMF.
The funding cost for borrowers to service their loans in Japan is increasing as long-term interest rates rise, following the Federal Reserve's hawkish turn. Meanwhile, a Japanese government subsidy program, which supports banks to offer no-interest and no-warranty loans to companies hit by the pandemic, will gradually end for some companies in the near future, adding pressure to their repayment abilities.
Potential losses
Among the trio, Mizuho had the highest loan exposure in Russia, totaling ¥217.70 billion as of September 2021, or 0.10% of its total assets. Its borrowers are mostly Japanese companies operating in Russia.
MUFG came in second, with outstanding loans in Russia at ¥150.24 billion, or 0.04% of its total assets. Sumitomo Mitsui, whose Russian operation mainly lends to projects run by local companies, had ¥96.45 billion of loans as of September 2021, or 0.04% of its total assets.
"Our loans in Russia essentially are in default," Tokyo's The Nikkei reported March 3, citing an unnamed executive of one of the three megabanks.
Credit pressure
"If [the megabanks] need to set aside more reserves, they should do so in this fiscal year," Shunsuke Oshida, head of credit research at Manulife Investment Research Japan, said.
Sumitomo Mitsui's loan loss provisions in the fiscal third quarter through Dec. 31, 2021 was the highest among the three banks and more than triple a year ago. Mizuho's third-quarter loan-loss provisions also rose sharply from a year ago and the previous quarter.
Meanwhile, loan-loss provisions at MUFG fell from a year earlier, but reversed from a writeback in the previous quarter.
"The war means higher interest rates and higher credit costs," Michael Makdad, an analyst at Morningstar, said.
As of March 9, US$1 was equivalent to ¥115.78.