Sumitomo Mitsui Financial Group Inc. will likely ease up on acquisitions as pressure on capital and risk profile increase after it committed more than $4 billion on deals in just four months.

The second-largest megabank in Japan has inked at least six investments since April 1 as it accelerates expansion outside Japan amid a slow domestic market. Announced deals include a planned $2 billion acquisition of an unprofitable nonbank lender in India and a $386 million minority stake in U.S. investment bank Jefferies Financial Group Inc. The total amount committed is equivalent to almost the bank's entire net profit of US$4.67 billion in the previous fiscal year.

SMFG said earlier the India deal, the company's largest acquisition over the past four months, would reduce its common equity Tier 1 capital ratio by 22 basis points, after the key ratio measuring its financial strength fell 3 bps to 9.8% as of March 31 from a year earlier. The foray into India's nonbank lending sector would also increase the SMFG's risk-weighted assets, an indicator of future regulatory capital needs, by ¥300 billion, or 0.3%, after rising by ¥3 trillion in the fiscal year ended March 31, the company said. The bank did not disclose projections on other deals.

"SMFG will probably enter a phase of executing planned investments in the near term, not accelerating overseas investments further,” said Rie Nishihara, a senior analyst at JP Morgan Securities Japan. As SMFG is targeting a CET1 ratio of around 10% by March 2023, they will likely slow down their overseas investments, Nishihara added.

Japanese financial institutions have been for years looking at overseas solutions to the domestic market that is still weighed by ultra-low interest rates and sluggish loan growth, a situation that is worsened by the lingering coronavirus pandemic.

Since 2015, SMFG and its subsidiaries have spent at least $8.8 billion on acquisitions in the banking and financial technology sectors, according to data compiled by S&P Global Market Intelligence. More than half of the deals were overseas.

"Our main scenario is not the one where they will make another series of investments over the next year or two that could keep pushing down their capital ratio," said Chizuru Tateno, a credit analyst S&P Global Ratings Japan.

Risky foray

SMFG said July 6 that it agreed to acquire a 74.9% stake in Fullerton India Credit Co. Ltd. from Singaporean investment company Temasek Holdings (Pte.) Ltd., pending regulatory approval. The Japanese bank intends to eventually have full ownership in the Indian company that has provided personal loans and financing of small businesses since 1994.

However, some analysts have raised concerns on the risk profile of the deal as the lingering pandemic in India has taken a toll on fast-growing lenders outside the formal banking sector. In addition, SMFG does not have a strong presence in India: it only has two branches in the world's second-most populous nation, a 4.5% stake in Kotak Mahindra Bank Ltd. and a 5.4% ownership in nonbank lender Northern Arc Capital Ltd.

"No one doubts that the nonbanking financial market in India is very attractive from a growth perspective," said Michael Makdad, an analyst at Morningstar. "But there are a lot of risks."

Total lending by nonbanks in India to small businesses and individuals — the key client segments for Fullerton India — grew by about 60% to 23.6 trillion rupees as of March 2020 from 14.8 trillion rupees three years ago.

However, Indian nonbanks, which were seen as a beacon of financial inclusion and economic growth, have become a major source of systemic risk since mid-2018 following scandals and defaults by several large players such as Infrastructure Leasing & Financial Services Ltd., Dewan Housing Finance Corp. Ltd. and Reliance Capital Ltd.

"The point is that India is very complex," Makdad said. "It takes a lot of time and involvement to run a business there smoothly."

Unprofitable venture

Fullerton India swung to a loss before tax of 16.14 billion rupees in the fiscal year ended March 31 as impairment on financial instruments more than tripled to 36.05 billion rupees. Its nonperforming loan ratio more than quadrupled to 9.6% from 2.1% during the same period, while its return on equity fell to negative 23.8%, a reversal from 18.0%, the data showed. That is far above the net nonperforming ratio of 2.7% for the overall sector last year.

SMFG said it expects to post a positive return from the Fullerton India investment from the third year.

"If they [SMFG] fail to make profit [from the India deal], they would have to book an impairment loss," said Toyoki Sameshima, a senior analyst at SBI Securities Co. SMFG could not be reached for comment.

While overseas operations offer new revenue sources or growth potential, this strategy had occasionally backfired on other Japanese financial institutions in the past.

Nomura Holdings Inc., for instance, booked losses totaling ¥220.8 billion from unwinding the leveraged bets by U.S. hedge fund Archegos Capital through its U.S. wholesale banking operation. The largest brokerage in Japan also had years of write-downs and cost increases after acquiring Lehman Brothers' assets during the 2008 financial crisis. Mitsubishi UFJ Financial Group Inc., the nation's largest megabank, has been facing higher credit risks than two other megabanks. The lender's larger international operations, especially in emerging Southeast Asia, leave it more exposed to loan defaults in economies hit hard by the coronavirus pandemic.

As of Aug. 2, US$1 was equivalent to 74.35 Indian rupees and ¥109.22.