Archegos Losses Test Japanese Bank Risk Controls, Fitch Says

The losses announced by some Japanese banks from dealings with a U.S. client will test the robustness of their risk controls, especially overseas where they’re seeking to offset a subdued domestic market, according to Fitch Ratings Inc.

Banks “could face not only financial and reputational risks, but also regulatory scrutiny or redress if authorities determine there were material governance deficiencies or risk management weaknesses,” Fitch said in a statement on Wednesday.

Mizuho Financial Group Inc. last week emerged as the third Japanese bank to face losses stemming from the collapse of Bill Hwang’s Archegos Capital Management under the weight of billions of dollars in leveraged stock bets. Nomura Holdings Inc. has signaled it stands to lose as much as $2 billion, while Mitsubishi UFJ Financial Group Inc.’s securities unit is booking a $270 million loss.

Other Japanese financial institutions could face similar losses, though their exposure may vary, Fitch said.

Risk Appetite

Although Nomura is yet to confirm exactly how much it will lose from Archegos, SMBC Nikko Securities Inc. analysts led by Masao Muraki this week said that Japan’s biggest brokerage may post a 95 billion yen ($866 million) loss in the fourth quarter as a result of the trades.

Such losses “also bring into focus these institutions’ risk appetite while in search of profit and whether they are adequately compensated for the risks involved over economic cycles,” Fitch said.

Fitch last week placed the bbb+ Viability Ratings of Nomura and its wholly-owned subsidiary, Nomura Securities Co., Ltd., on rating watch negative, due to the potential losses.

The agency said it doesn’t expect there to be a substantial impact on MUFG’s financial profile, but warned that the losses could affect the bank’s “long-term earnings contribution from its securities business should it revise its risk appetite in the overseas securities business.”

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