Analysis: Door slams on Japan bank rally as focus turns to bond holdings
in wake of SVB
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[March 14, 2023] By
Tom Westbrook
SINGAPORE (Reuters) - Tokyo banking stocks stood within sight of decade
highs last week, testing the top of a range that has bound them since
the 2008 global financial crisis -- then Silicon Valley Bank collapsed,
dashing hopes of a new dawn for banking in Japan.
Losses in Silicon Valley Bank's bond portfolio have highlighted similar
risks for Japanese lenders' gigantic foreign bond holdings, which are
carrying over 4 trillion yen ($30 billion) in unrealised losses.
At the same time, a radical shift in the global interest rate outlook
has dashed bets on policy normalisation - and more lucrative lending -
any time soon in Japan.
Three days of selling has the Tokyo Stock Exchange banks index down 16%
- its sharpest drop since the days after the 2011 earthquake and tsunami
struck Japan. The index led falls in Asia on Tuesday while other markets
steadied. [.T]
"Japanese banks share with SVB the characteristic of having substantial
holdings of bonds, whose prices fall when bond yields rise, creating
solvency risk," said Michael Makdad, a senior equity analyst at
Morningstar in Tokyo.
Most, he said, have hedged their exposure and stand prepared to manage
losses. Japan's banks have also said as much.
But sharp falls in the shares of Japan Post Bank, which Makdad
calculated as the most exposed, and some slight wobbles in bond prices
for the unlisted Norinchukin - also with heavy exposure - illustrate
concern and Japan's vulnerability.
Japan's bondholdings are also huge. Japanese investors are the largest
foreign owners of U.S. Treasuries, with financial firms chief among big
holders since low domestic loan rates and low yields drive them to find
better, but safe, returns elsewhere.
"The difference comes from the loan-to-deposit ratio," said Norihiro
Yamaguchi, senior economist at Oxford Economics.
"In Japan, it's quite low compared to other banks in the Asian region,
so it means that they rely heavily on bond investments," he said. "With
the chronic low interest rate environment in Japan, they actively invest
in U.S. Treasuries."
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The Tokyo Stock Exchange (TSE) building
is seen in Tokyo, Japan October 1, 2020. REUTERS/Issei Kato/File
Photo
BONDS GETTING HIT
Most of the time, bond losses aren't a problem for banks, which
typically hold their investments to maturity.
But after the worst year in global bond markets for decades, the
losses are very big -- foreign bond losses totalled about 3 trillion
at the end of December at Japan's top three banks, and analysts at
SMBC Nikko calculated another 1.4 trillion yen in unrealised foreign
bond losses for regional banks.
Most analysts agree these risks are in hand. An annual Bank of Japan
report published on Tuesday said Japanese financial institutions
have sufficient capital buffers.
But it also said portfolio losses have swelled at regional banks,
and that is where selling pressure has been heaviest as investors
fret that smaller lenders will find it harder to navigate market
volatility.
Share prices for such lenders had rallied hardest through the autumn
as speculation mounted that a shift out of ultra-easy policy
settings in Japan was in the offing and the prospect of higher
interest rates and better margins lay ahead.
Japan's top regional bank, Resona Holdings, was the biggest loser on
the Nikkei on Tuesday, dropping 9.2%, and is now falling harder than
peers with a 21% loss in three days.
Japan's biggest financial firm, Mitsubishi UFJ Financial Group fell
8.6% on Tuesday and has lost more than 2 trillion yen in market
value with a 17% drop in three sessions.
"I think it's about bonds getting hit," said Joshua Crabb, head of
Asia-Pacific equities at Robeco. "And maybe some concerns Japanese
banks have exposures, and some profit taking," he said. The banking
index rose 40% from September to February.
($1 = 134.0900 yen)
(Reporting by Summer Zhen in Hong Kong, Rae Wee and Vidya
Ranganathan in Singapore and Makiko Yamazaki in Tokyo; Writing by
Tom Westbrook; Editing by Simon Cameron-Moore)
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