Japanese megabanks are likely to report higher nonperforming loan ratios in the coming quarters as the lenders have set aside more buffers against bad debts amid a modest economic recovery and rising borrowing costs.
Sumitomo Mitsui Financial Group Inc. earmarked ￥131.05 billion as loan loss provisions, an indicator of a lender’s assessment of future asset quality, in the fiscal third quarter ended Dec. 31, 2021. It was up sharply from ￥34.56 billion a year ago and ￥16.33 billion in the previous quarter, and the highest among the three megabanks. As of end-2021, the bank’s NPL ratio stood at 1.22%, up from 1.04% in the previous quarter and 0.90% a year ago.
Mizuho Financial Group Inc.'s third-quarter loan loss provisions also rose sharply to ￥98.27 billion from ￥16.88 billion a year ago and ￥52.23 billion in the previous quarter. The lender’s NPL ratio increased to 1.36% from 1.02% in the previous quarter and 0.97% a year ago.
Loan loss provisions at Mitsubishi UFJ Financial Group Inc. stood at ￥45.20 billion as of the end of the third quarter. It was a reversal from a writeback of ￥23.00 billion in the previous quarter, but down from ￥85.24 billion of provisions a year ago. The nation’s largest megabank by assets did not disclose its NPL ratio for the fiscal third quarter, after the ratio stayed at 1.25% over the previous three quarters.
“My forecasts are for NPLs to keep rising [over] the next couple years,” said Michael Makdad, an analyst at Morningstar.
The funding cost for borrowers to service their loans is increasing as Japan’s long-term interest rates rise, following the Federal Reserve’s move. The yield of 10-year Japanese government bonds rose to 0.211% Feb. 10 from 0.08% at the start of the year. Meanwhile, The 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.
The Japanese economy is expected to expand 1.6% in 2021, following a 4.8% contraction in 2020, according to an estimate by the IMF. The IMF projects the country’s economy to grow 3.3% in 2022, lower than the 4.4% growth it predicts for the global economy.
“The economic recovery is slower than anticipated,” Toyoki Sameshima, a senior analyst at SBI Securities Co., said. “I can’t rule out a possibility of rising [nonperforming] ratios further.”
A fresh wave of COVD-19 infections has forced 33 of Japan’s 47 prefectures to be placed under quasi state of emergency and would weigh on the economy.
Sumitomo and Mizuho said they made provisions for their “large customers” in the October-to-December period, declining to elaborate further. Some of the problem loans may be associated with green projects as large corporations are piling on sustainable initiatives in line with the zero-emissions goals set by Tokyo earlier, Sameshima said.
As of Feb. 9, US$1 was equivalent to ￥115.44.