BOJ Squeeze on Bank Loan Profits Puts Focus on Bond Business

(Bloomberg) -- A year into the Bank of Japan’s monetary policy experiment in negative rates, the nation’s biggest banks are lending less while large corporations push bond funding to record levels, putting a greater focus on their note underwriting business.

Loan balances at Mitsubishi UFJ Financial Group Inc. and its four so-called city bank peers fell by 0.1 percent from a year earlier to 190.5 trillion yen ($1.75 trillion) as of March 31, the first decline in six years, data from the Japanese Bankers Association show. At the same time, the outstanding balance of corporate bonds rose 3.7 percent to 59.4 trillion yen as of end-February, according to the Japan Securities Dealers Association.

The trend is forcing banks to rethink their business model as bond underwriting grows in significance. The negative interest-rate policy introduced by the Bank of Japan in February last year led to a drop in interest income at banks, which must now diversify profit sources, Takashi Oyamada, chairman of the Japanese Bankers Association, said in an interview with Bloomberg last month.

“Loans were unable to beat bonds on the terms and conditions side,” particularly in the first three months of this year, said Satoshi Oda, Tokyo-based general manager of syndication at Credit Agricole SA. Companies capable of issuing bonds were considering them first before looking to loans, he said.

Bond issuance surged 65 percent in the fiscal year ended March to a record 11.5 trillion yen, according to data compiled by Bloomberg. Shoemaker Asics Corp. sold its first ordinary corporate bond to investors in December.

“We wanted to achieve balanced funding with both direct and indirect finance,” said Hiroshi Abe, an assistant manager in the finance team at Asics. Abe said the firm would consider further issuance as needed while watching market conditions, noting that interest rates were an important factor.

While yields on government bonds with maturities of 10 or more years have returned to positive levels, shorter-term yields remain negative as the BOJ conducts its yield curve control. Oda said companies can issue short-term paper cheaply at the same time as banks have become reluctant to lend long-term at fixed rates while U.S. yields rise.

More Selective

Banks make an average of a 24 basis-point margin between the interest they pay on deposits and receive on loans, according to the Japanese Bankers Association. That’s 5 basis points lower than a year earlier and 15 less than three years earlier. Net interest income at Japan’s three megabank groups fell by about 10 percent from a year earlier in the nine months ended December as lending spreads tightened.

“Banks are becoming more selective about unprofitable lending mainly to large corporations,” said Takashi Miura, an analyst of Japan’s banking sector at Credit Suisse Group AG. “And lenders have also been reluctant to grow risk-weighted assets because of international regulations.”

There is an upside for companies seeking lower financing costs in the bond market. Holding back on lending may be contributing to falling note rates, according to Mana Nakazora, BNP Paribas SA’s chief credit analyst in Japan. Capital not being channeled into lending “is coming into bond markets, which is crushing corporate-bond spreads,” she said.

Japan’s five city banks are MUFG, Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc., Resona Bank Ltd. and Saitama Resona Bank Ltd. Regional banks, second-tier regional banks and trust banks -- all of which have fewer loans to large corporations which are major bond issuers than their megabank peers -- have maintained their lending growth.

To contact the reporters on this story: Gareth Allan in Tokyo at gallan11@bloomberg.net, Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net, Tesun Oh in Tokyo at toh15@bloomberg.net.

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Marcus Wright at mwright115@bloomberg.net, Reed Stevenson