Analysis: Door slams on Japan bank rally as focus turns to bond holdings in wake of SVB

Japan Post Bank

14/03/2023 09:35

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      Japan banking index dives 16% in three days
    

        * 
      Bets on policy shift evaporate; jitters as bond losses
grow
    

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      Regional banks hit hardest
    

  
    By Tom Westbrook
       SINGAPORE, March 14 (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  .IBNKS.T  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  7182.T ,
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."
    
    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  8308.T , 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  8306.T  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)

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Bonds are a huge part of Japanese banks' assets    https://tmsnrt.rs/3FJDAxV
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 (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)
 ((tom.westbrook@tr.com; +65 6973 8284;))