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Large Japanese Banks: Higher Overseas Net Interest Income Offsets Losses on Foreign Bonds in FY22

DBRS Morningstar has released a commentary discussing the three Japanese mega banks’ recent FY 2022 results, including MUFG Bank Ltd, Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho Bank Ltd.

Key highlights include:

• The three Japanese mega banks reported largely stable or improved results in FY 2022 (April 2022-March 2023) compared to FY 2021.

• On an aggregate basis, net interest income (NII) from overseas operations increased, meanwhile the banks reported lower credit costs in FY 2022 compared to FY 2021. However, the banks also reported net losses on debt securities mainly in foreign bonds.

• The banks have a solid credit risk profile, with strong asset quality metrics, but also sizeable concentration of Japanese Government Bonds (JGBs), as a % of Tier 1 capital, which exposes them to market risk especially interest rate risk.

• Looking ahead, while it is unclear if/when the Bank of Japan will change its yield curve policy, we note the banks estimate domestic NII will benefit from an increase in the interest rate to 0% from -0.1%. An increase in domestic rates could also result in higher unrealized losses from the banks’ holdings of Japanese Government Bonds (JGBs), which could have an adverse impact on the banks’ capital cushions over minimum regulatory requirements.

“If the impact of rising interest rates is not managed appropriately, we consider the interest risk could be exacerbated by the size of the banks’ debt securities portfolios,” said Vitaline Yeterian, Senior Vice President, Global Financial Institutions at DBRS Morningstar. “Against this backdrop, we expect the banks to maintain strong capitalisation levels with solid capital buffers above minimum requirements.”