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Morningstar | Japan Post Bank's lack of a lending business makes it difficult to bring ROE above 4%.

Japan Post Bank has more customer deposits than any other financial institution in Japan (15% of all deposits) but differs from a typical bank in that it makes few loans (less than 4% of its total assets) and instead invests in securities on the asset side of its huge balance sheet, making it more like a deposit-funded investment pool. It was converted from a former government agency into a business corporation in 2007 and partly privatized in 2015 when its parent company Japan Post Holdings sold an 11% stake to the public. At present, the government retains control over Japan Post Bank while there exists a legal requirement for full privatization to occur "as early as possible," without a specific deadline. Since 2007, Japan Post Bank has never achieved an annual return on equity higher than 4% (the highest was 3.8% in the year ended March 2008), and we forecast an average of only 2.4% over the next five years, well below our assumed cost of equity for Japan Post Bank of 8%. Japan Post Bank is working on improving its profitability as it shifts assets from Japanese government bonds to a more diversified portfolio including overseas sovereign and corporate bonds (mostly hedged for currency risk) and smaller allocations to risky and illiquid assets like hedge funds and real estate. Given the relatively low coupons on its legacy assets of Japanese government bonds, improving returns from their current abysmal levels shouldn't be too difficult even if currency hedging costs are somewhat high, but we expect Japan Post Bank to take a gradual approach because the government’s aim of fully privatizing the company eventually implies that parent Japan Post Holdings needs to first develop its own sources of profit independent of its financial subsidiaries. Beyond our forecast horizon, there is potential for profit growth if Japan Post Bank can cut the fees it pays to Japan Post Co. (the subsidiary of Japan Post Holdings that operates post offices) for use of shared resources. However, in our view Japan Post Holdings would first need to successfully develop its own profit sources to support the post offices before fees from Japan Post Bank could be significantly reduced.