Japan banks face volatility, default risks offshore in hunt for higher returns

spglobal.com -- Apr 15
As returns-hungry Japanese banks may lend or invest even more abroad after a record year of 2020, the lenders face rising risk of defaults and market volatility in their growing overseas operations, analysts warn.

Japanese financial institutions have a long history of generating interest income and asset growth from operations outside their home market, which has been battered by a prolonged period of low interest rates and weak credit demand. The risks of global exposures came under the spotlight again in early April, when Nomura Holdings Inc., Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. flagged potential losses of around US$2.4 billion combined that were reportedly related to the downfall of U.S. hedge fund Archegos Capital.

The Archegos saga, while not directly related to banks' lending business, is "the result of accelerated allocation of funds to overseas markets, fueled by the low interest rates at home," said Shingo Ide, chief stock strategist at NLI Research Institute.

As of 2020-end, the outstanding overseas loans and investments of Japanese banks with offshore assets of more than ¥100 billion each rose to a record of $4.851 trillion, up 9% from a year earlier, the biggest increase in more than four years, according to the Bank of Japan that cited a Bank for International Settlements’ analysis in March.

Nearly half the $4.851 trillion that Japanese banks financed or invested as of the end of 2020 was destined for the U.S., while 23% of that amount was allocated to Europe and 9% to Asia-Pacific, according to the BOJ data.

According to a Japanese government official, who asked not to be named, much of the growth of overseas investments comes from sovereign bonds, asset-backed securities and mutual funds.

U.S. corporate bankruptcies reached their highest levels almost in a decade in 2020 as the pandemic upended global industries and struggling companies faced their breaking points.

"Some lending risks are there for them [Japanese banks] -- default risk, credit risk and market risk" as they allocate more funds to overseas markets, Nana Otsuki, chief analyst at Monex Inc., said. "There is a possibility that they [Japanese banks] will suffer a loss from a market volatility in the U.S. and Europe."

- spglobal.com