Mizuho's Surprise $6.1 Billion Charge Shows Risks of Yield Quest

(Bloomberg) -- Japanese banks’ quest for yield is creating more turbulence, with Mizuho Financial Group Inc. announcing another round of losses on its foreign-bond holdings as part of a surprise writedown that will severely curtail full-year profit.

Mizuho slashed its net income forecast by 86 percent on Wednesday after booking 680 billion yen ($6.1 billion) of charges tied to business restructuring and securities losses. Chief Executive Officer Tatsufumi Sakai said he will forfeit his performance-related pay to take responsibility for the writedown.

The charge underscores the challenges faced by Japanese banks as rock-bottom interest rates at home prompt them to look abroad for returns. It also reflects Mizuho’s plans announced in November 2017 to eliminate branches and jobs over a decade in a bid to counter headwinds including financial technology disruption and tepid credit demand from a shrinking population.

“Bank shares were struggling in any case because negative rates were hurting their performance,” said Shinichi Tamura, a Tokyo-based strategist at Matsui Securities Co. “Now this massive impairment loss means Mizuho may be avoided even more, especially by foreign investors.”

Mizuho now expects net income of 80 billion yen for the year ending March, down from 570 billion yen previously. The charge includes:

  • 500 billion yen of writedowns on fixed assets tied to factors including software at its retail business and plans to close branches
  • 180 billion yen of losses relating to the restructuring of securities, including past investments in foreign bonds.

The bank has cut the “negative carry” on its foreign bonds and rebuilt the portfolio to enable stable earnings, Sakai, 59, said at a news briefing in Tokyo. Overseas bonds accounted for about 150 billion yen of the charge, he said, without elaborating. Negative carry refers to returns that fail to exceed the cost of financing the purchase of an asset.

“Valuation losses on foreign bonds reflect the risk that Japanese banks take in investing overseas,” said Tetsuya Yamamoto, a senior credit analyst at Moody’s Investors Service in Tokyo. Mizuho had the biggest valuation loss on its foreign bonds of the nation’s three so-called megabanks in the year ended March 2018, when Treasury yields were climbing.

The bank also plans to improve how it values derivatives, including by more precisely reflecting counterparty risk, it said in a statement.

Shares of Japan’s third-biggest lender by market value closed 0.4 percent lower in Tokyo before the announcement. The stock has gained 2.9 percent this year after losing 17 percent in 2018.

Sakai said the charge was the result of a review that took place since he took the CEO post in April last year. He replaced Yasuhiro Sato, under whose watch the bank unveiled plans to cut about 100 outlets and 19,000 jobs over eight to 10 years.

Mizuho will announce its next business plan in May, which will resolve a “mismatch” in how it allocates management resources that has arisen over many years, the bank said in the statement. Priorities include digitalization of its retail business, and working more closely with companies seeking to do business in rapidly growing Asian economies.

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