Norinchukin’s capital raising signals support, but high rates still a problem

Unrealised losses on bonds climbed higher in Q2.

Norinchukin Bank’s capital enhancement measures indicate strong support from its member cooperatives, but high interest rates will continue to weigh on profitability.

The bank is redeeming approximately JPY 700b of perpetual subordinated loans and intends to raise JPY 736b of lower-dividend rate stocks. This new equity issue is expected to improve its Common Equity Tier1 (CET1) ratio by 2.8 percentage points (ppt) to 19.2%, Moody’s Ratings said in a report.

Norinchukin Bank is also issuing about JPY 600b of fixed-term subordinated loans to its member cooperatives in the current fiscal year.

These measures reflect “strong support from the bank’s member cooperatives, in times of need,” Moody’s said. 
Norinchukin Bank also maintains a solid deposit base thanks to its role as the central financial organisation for Japan's agricultural, forestry, and fishery cooperatives.

However, higher-for-longer interest rates will continue to hurt Norinchukin Bank’s profitability, according to Moody’s, which stated that it still has the bank booked for a downgrade from its current A1 long-term deposit and senior unsecured debt ratings.

Unrealised losses on bonds of available-for-sale securities and other money held in trust rose to JPY2.3t in end-June, from JPY2.2t in the preceding quarter and JPY1.9t in end-June 2023– a result of a further increase in global interest rates.

“[Foreign] funding costs are higher than investment yields on a large share of the bank's foreign bonds,” Moody’s said.

Moody’s said that it is considering the “sustainable level of capital as [Norinchukin Bank] restructures its investment strategy.” 

“We will also consider whether its capital enhancement will provide the capacity to restructure the bank's asset mix including its investment portfolio and loans after divesting unprofitable foreign bonds and realizing large losses,” Moody’s said, regarding its downgrade review plans.

Other factors to consider is how the higher-for-longer interest rates will impact Norinchukin’s profitability over the next 1-2 years, as well as the bank’s ability to raise new equity capital from member cooperatives.