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Fitch: Japanese Mega Banks' Resilience to Shocks has Increased.

Tokyo: Japanese "mega" banks' overall resilience to major risks, including market shocks, has increased in recent years, owing to strengthened capitalisation and reduced holdings of Japanese government bonds (JGBs) and equities, according to sensitivity analysis detailed in a report published today by Fitch Ratings. However, increased holdings of foreign bonds, particularly US Treasuries, has made the earnings and capitalisation of the mega banks more sensitive to global monetary tightening.

The JGB holdings of the three mega banking groups - Mizuho Financial Group (MHFG), Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG) - have fallen steadily since FYE11, which at least partly reflects a decline in yields amid large-scale bond purchases by the Bank of Japan (BOJ) under its policy of aggressive monetary easing. This significant reduction in exposure and the short duration of remaining holdings mean that an increase in JGB yields would be more manageable for the three banks.

The mega banks have also reduced their equity holdings in recent years, in keeping with a plan announced in 2015 to cut equity holdings by around 30% in the medium term. However, the market value of their holdings has so far remained largely unchanged due to rising Japanese stock prices. Risk associated with equity holdings is higher than that of other asset classes, which is likely to remain the case even as exposure is pared back further, but each bank would be able to absorb a 30% decline in stock prices without significant difficulty.

A deterioration in domestic loan quality is unlikely in the near term, given the generally sound quality of borrowers and recent upturn in the Japanese economy. In any case, an increase in credit costs to 50bp of loans would not significantly affect banks' capital ratios. There is some risk associated with the growing foreign loan portfolio. However, banks are likely to continue to balance overseas expansion against risk-weighted asset increases. We expect banks to further pivot towards the US, where their lending growth is set to exceed that in emerging markets.

Falling domestic security exposure has been in contrast to a rise in holdings of foreign bonds, as banks have sought alternative investments amid persistently weak domestic loan demand and low JGB yields. Banks' sensitivity to foreign bond yields has therefore increased, and it is likely to be tested over the next couple of years as the US Federal Reserve continues to unwind Quantitative Easing (QE) and hike rates. The European Central Bank is also likely to phase out asset purchases by the middle of next year. Our analysis suggests a 150bp rise in yields on foreign bonds would reduce the banks' Fitch Core Capital ratios by 140bp for MHFG, 100bp for MUFG, and 40bp for SMFG.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 3, 2018
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