Mizuho Chases Riskier Clients Overseas, Trying to Revive Profit

(Bloomberg) -- Mizuho Financial Group Inc. is becoming more aggressive in chasing riskier clients outside Japan as it seeks to reverse the recent decline in its full-year profit, according to Chief Executive Officer Tatsufumi Sakai.

The Tokyo-based lender may have been a “little conservative” in adjusting its asset profile toward non-investment grade assets overseas and away from lower-margin clients, Sakai said in an interview this week. “We needed to strategically rethink our appropriate risk-taking function and we’re implementing that this year,” he added.

Mizuho Chases Riskier Clients Overseas, Trying to Revive Profit

Like other Japanese banks, Mizuho has been chasing higher-yielding assets as it attempts to offset the effect on its lending business of razor-thin domestic interest rates. However, it has mostly fared worse than its peers -- Mitsubishi UFJ Financial Group Inc. and Sumitomo Financial Group Inc. Of the three Japanese mega-banks, Mizuho was the only one to report lower profit for the fiscal year ended March 31.

Sakai said Mizuho would target non-investment grade companies, mostly in the U.S., for lending and debt capital markets transactions, in order to raise the overall risk profile of its clients. The companies would mainly be ‘BB’ rated, below the ‘BBB’ investment-grade threshold, though they would include some with ‘B’ ratings, Sakai said.

“The non-investment-grade market has a large fee pool and we still have plenty of room for penetration,” said Sakai. He declined to comment on how much of the portfolio would be shifted to those assets.

Managing Risk

Mizuho will manage the added risk by being selective with individual counterparties and focusing on companies in a handful of sectors, such as health care, retail and telecommunications, according to Sakai. He noted that the well-developed credit default swap market in the U.S. gives the bank the ability to hedge.

“High-yield U.S. debt is an area with improving fundamentals, supported by better economic growth, better corporate earnings, lower corporate tax rates and declining leverage,” said Makoto Kuroda, a senior analyst covering banks at Credit Suisse Group AG in Tokyo. “The U.S. is the right geography, and going up the risk curve within the U.S. is a smart strategy.”

Mizuho’s Global Corporate Company, which serves Japanese and non-Japanese corporate customers outside Japan, cut what it calls “low-profitability assets” by 470 billion yen ($4.3 billion) in the fiscal year ended March, replacing them with 360 billion yen of overseas risk-weighted assets earning higher returns. The less-profitable clients include companies that have borrowed from Mizuho but have failed to follow through with debt capital markets or merger and acquisition business.

In the current fiscal year, it has targeted an additional 460 billion yen of the riskier assets in areas such as structured finance, debt capital markets and transaction banking.

BOJ Policy

Sakai downplayed the effect on Japanese lenders of the Bank of Japan’s policy adjustment last month, saying it was more targeted at improving the functioning of the government bond market than at helping financial institutions.

“There had been significant concerns over the price discovery function in the JGB market, and what is meaningful is that we can expect some recovery in liquidity as a result of greater flexibility in yield curve control, which is very much welcome,” said Sakai. “It was more about improving market functions than thinking about banks.”

He said the policy adjustment by itself won’t change Mizuho’s stance toward investing in JGBs.

Mizuho’s net income declined 4.5 percent to 576.5 billion yen in the fiscal year ended March, falling below 600 billion yen for the first time since 2013. That result was supported by non-core items, including a large clawback of reserves set aside for bad loans and gains on sales of cross-shareholdings, while trading income slumped and customer business remained flat. However, the bank’s performance improved in the first quarter ended June, achieving 28 percent progress toward its full-year target.

New Plan

Sakai said that the company is in the middle of putting together its next medium-term business plan, which will begin in April, and indicated that it may not necessarily be a three-year one as is typical with Japanese banks. The plan for the three years ending March 2019 includes targets for capital ratios, return on equity and disposal of cross-shareholdings.

“We need to think about the steps we need to take to get us to where we want to be in 10 years’ time,” said Sakai. “We’re not thinking about simply working on a three-year span.”

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