Japanese banks running out of room to cope with negative rates

Bloomberg

Japanese banks have spent more than three years trying to flee negative interest rates at home by ramping up lending abroad. Now their escape routes are closing.
Declining global rates are buffeting the country’s three largest lenders as they prepare to post fiscal first-quarter results next week. And with central banks around the world now in monetary easing mode, financial firms are growing concerned that the Bank of Japan (BOJ) may loosen policy further.
“There is a limit to what banks can do to cope” with negative rates, Japanese Bankers Association Chairman Makoto Takashima said.
That bodes ill for Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc, which have about a third of their loans abroad. What’s more, the Tokyo-based banks face rising bad-loan costs and diminishing gains from selling shares held in their corporate clients — factors that had been propping up earnings as loan profitability eroded.
The triple-whammy of low global rates, rising provisions and limited stock gains mean first-quarter results “will probably be subdued and may set the tone for the rest of the year,” said Francis Chan, a Bloomberg Intelligence banking analyst.
Shares of the three banks fell less than 1 percent in Tokyo. Sumitomo Mitsui is the best performer this year, climbing 4.9 percent, while Mizuho has slid 7.9 percent and MUFG is down 2 percent.

Record-Low Rates
The squeeze on banks’ domestic lending profitability got even worse last quarter. The average interest rate on new loans tumbled to a record-low 0.576 percent in May, Bank of Japan data show, and 10-year Japanese bond yields have been negative almost all year.
To be sure, the drop in interest rates abroad isn’t entirely bad news because it will allow the banks to book gains on their foreign bond holdings in the short term, said Rie Nishihara, an analyst at JPMorgan Chase & Co in Tokyo. She predicts the lenders will achieve at least 25 percent of their full-year profit targets during the period.
MUFG and Mizuho expect net income to rise in the fiscal year through March — but only because they booked hefty writedowns in the last quarter of the previous year. Sumitomo Mitsui is forecasting a profit decline.
In recent years, Japanese banks booked profits from clawing back loan-loss provisions that weren’t needed because of gradually improving economic conditions. While it’s unlikely that loan quality will suddenly deteriorate, those reversals have now reached their limit and it’s time to replenish reserves.
“One thing that should make their lives more difficult will be rising credit costs,” said Michael Makdad, an analyst at Morningstar Inc in Tokyo.
Japanese banks have been trimming their so-called cross-shareholdings in recent years following government efforts to loosen cozy ties between lenders and their corporate clients.