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Fitch: Japanese 'Mega' Banks Facing Multiple Growth Headwinds
February 8, 2017 / 2:54 AM / 8 months ago

Fitch: Japanese 'Mega' Banks Facing Multiple Growth Headwinds

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Japan's 'Mega' Banks Facing Multiple Challenges here TOKYO/HONG KONG, February 07 (Fitch) Overall performance of the Japanese banking system remains stymied despite sound domestic asset quality and credit costs, says Fitch Ratings. Fitch's Special Report on the Japanese 'mega' banks, published today, summarises the challenges of Abenomics and Japanese mega banks' multiple headwinds under the current operating environment. Fitch sees the Japanese government's policy launched in 2012 as at a crossroads, which has triggered the authorities' introduction of unconventional policies - Qualitative-Quantitative Easing (QQE) and Negative Interest Rate Policy (NIRP). We view NIRP as holding back the banking system's net interest revenue, while having little impact on Japan's real economy. We estimate a 10bp reduction in the market-linked lending rate would hit the mega banks' aggregate gross operating profit by JPY100bn in fiscal year (FYE17, ending March 2017), although there is little room for the base rate to fall further. To offset the decline in net interest income in FYE17, domestic loans would need to have grown at an annual rate of 5%-6%, higher than the past three fiscal years' average growth rate of 3%. The mega banks' domestic loan balances have changed little since the introduction of Abenomics, given weak credit demand and the banks' focus on overseas expansion. Asset quality in their portfolio has improved, and is likely to remain sound, while the growth in risk-weighted assets (RWA) is in line with the banks' asset growth, indicating no significant increase in risk appetite in recent years. However, we believe overseas expansion would add challenges in credit risks and competition. Fitch still expects the contribution from the banks' overseas business to rise further in the medium term, largely through growth in the US. Overseas expansion also exposes them to challenges in funding - the shift of funding sources to relatively longer-term funding sources (initially spurred by changes in US money-market fund (MMF) regulation) is likely to exert further pressure on the banks' foreign-currency funding costs. Fees and commission-based revenue - specifically from security subsidiaries - have significantly contributed to the growth of the banking groups. Yet we view market volatility as limiting the sustainability of earnings. Such volatility is also a limiting factor in the quality of capital improvements at banks exposed to fluctuations in unrealised gains - mainly from equity holdings. Fitch also expects the banks' greater struggles to sustain stronger profitability will limit further improvement in the groups' CET1 ratio to 30bp-40bp on average in FYE17 from around 50bp in the last three years. The report "Japanese 'Mega' Banks Facing Multiple Challenges" is available at www.fitchratings.com or by clicking the link in this media release. Contact: Naoki Morimura Director +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku, Tokyo 102-0083 Jonathan Cornish Managing Director +852 2263 9901 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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