Major Japanese banks face an increased credit risk in their U.S. lending business as rising interest rates and slower economic growth could hit their plan to lend more to lower-rated borrowers.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. said in May they planned to boost their fee income by offering syndicated loans and related securities to non-investment-grade U.S. companies over the next two years.
"[Japanese banks] are competing to increase a presence in that area [syndicated loans] to earn higher profit," said Toyoki Sameshima, a senior analyst at SBI Securities Co. "Of course, there should be growing risks facing them."
Japanese banks have been seeking higher returns from lending and offering financial and wealth services overseas for years as their domestic businesses have been affected by ultra-low interest rates and sluggish credit demand. Such efforts have sometimes backfired, including the sharp jump in overall credit cost Mitsubishi UFJ Financial Group, or MUFG, reported in the fiscal year ended March 2021 as overseas markets, such as Southeast Asia, the U.S. and Europe, were battered by recession following the coronavirus pandemic.
Central bank warning
The Bank of Japan warned of "various risks" facing banks that had accelerated into the U.S. syndicated loan market for non-investment-grade companies.
"With an aim to expand a fee business, [Japanese banks] are in the direction to accelerate syndicated loans [in the U.S.]," the central bank said in an April report. "It is increasingly important to note that [the banks] could face various risks related to them."
As of September 2021, the outstanding balance of syndicated loans to non-investment-grade companies in the Americas for major Japanese banks reached US$38 billion, or 21% of their total U.S. loan book, data from the Bank of Japan showed. For major Japanese banks, the balance stood at US$183 billion, also 21% of their total U.S. loan book for the period.
Japanese banks were the lead managers of 15% of all U.S. leveraged loan deals in 2021, including non-investment-grade companies, up from about 5% in 2012, according to the central bank.
"Such an alarm bell won't pull [the Japanese banks] back [from the market]," Sameshima said.
Banks press ahead
MUFG aims to expand its wallet share and ranking in the U.S. syndicated loans and debt capital market to 12th in 2023 from 17th in 2021.
Mizuho Financial intends to pursue "selective expansion" in non-investment-grade loans to the technology, telecom and healthcare sectors in the U.S. Loans to lower-rated companies outside the U.S. accounted for 29% of the bank's total loans outside Japan as of March 31, up from 23% two years ago.
"The higher interest rates seem like a double-edged sword to us," a spokesperson at Mizuho Financial said.
Leveraging its partnership with Jefferies Financial Group Inc., Sumitomo Mitsui Financial seeks to strengthen its securitization business, including non-investment-grade loans, in overseas markets. The company expects to generate operating profits of around ¥75 billion in the current fiscal year ending in March 2023 from about ¥50 billion-plus in the previous year.
The three banks increased their loans in the Americas to ¥33.932 trillion combined as of March 31 from ¥27.188 trillion in March 2018. During the same period, nonperforming loans in the Americas increased to ¥309.81 billion from ¥277.55 billion.
"[Japanese banks] can't make profit without taking risk," said Shunsuke Oshida, head of credit research at Manulife Investment Research Japan. "Now is the time for them to put to the test their capabilities to rise to the occasion.”
As of June 7, US$1 was equivalent to ¥131.67.