Japan megabanks’ bad loans edge up to highest in six years

Billion-dollar exposures to Russia contributed to the negative outlook.

The asset quality of Japanese megabanks is expected to worsen as their bad loans rose to their highest level in six years, warned S&P Global Market Intelligence.

New challenges posed by rising oil and energy prices, a weakening yen, and supply-chain disruptions following global sanctions against Russia, could possibly push the non-performing loans (NPL) ratios of the three megabanks–Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group, and Mizuho Financial Group–further upwards, said Takahide Kiuchi

"There are no elements that would make them optimistic [about their businesses]," said Toyoki Sameshima, a senior analyst at SBI Securities.

"The effects from higher import prices, combined with the aftermath of the pandemic and higher interest rates, will emerge more clearly later," Kiuchi said.

Growing inflationary pressure and higher interest rates are amongst some elements causing downside risks to the creditworthiness of borrowers, according to S&P Japan Credit Analyst Chizuru Tateno.

In press conferences, the three banks have separately stated that they are prepared to increase buffers against loan losses amidst uncertain prospects for the economy. 

The banking groups reported year-over-year increases in their NPL ratios for the fiscal year ended 31 March. MUFG’s ratio for the period climbed to 1.33% from 1.27%, whilst Sumitomo Mitsui Financial's rose to 1.27% from 1.44%. Mizuho Financial's NPL ratio increased to 1.33% from 1.01%.

All three recorded an increase in bad loans: Mitsubishi UFJ Financial's NPLs came to ¥1.47t, the highest level since 2017, and more than half of which was bound for domestic customers. Sumitomo Mitsui Financial's NPLs grew to ¥1.15t, its highest since 2015. And Mizuho Financial's NPLs grew to ¥1.12t, also the highest level since 2015.

Worsening loan quality came as Japan's economy shrinking 0.2% in the first quarter on accelerating inflation and a surge in cases of the omicron variant of COVID-19.

Japanese megabanks’ exposure to Russia also contributed partly to the rise in NPLs. Sumitomo Mitsui Financial’s outstanding loans to Russia stood at $2.92b as of March 31, half of which were from local companies.

"We cut our [Russian] deals drastically but we can't be optimistic [about our Russian operations] because they remain fluid," Sumitomo Mitsui CEO Jun Ohta reportedly said during an earnings press conference.

Mitsubishi UFJ Financial and Mizuho Financial exposure to Russia for the period came to about $2.39b (¥310b) and $2.92b, respectively.