Japanese Banks: Risks and Opportunities Jonathan Cornish, Managing Director

Transcription

1 Japanese Banks: Risks and Opportunities Jonathan Cornish, Managing Director 19 September 213

2 Agenda Macro Environment Risks and Opportunities for Japan s Banks

3 Run-up in Advanced Economies Public Debt is Unprecedented in Peacetime Gross Public Debt (% of GDP) 3 US UK Germany Japan Japan-Russia War Japanese Bubble Bursts Napoleonic Wars American Civil War First World War Second World War Source: IMF Public Finance Historical Dataset

4 Debt Overhang to Weigh on Developed Countries Rising DM Public Debt Burden DM EM (% GDP) f Source: Fitch Gross Debt Composition, 212 China Germany Australia Canada France US Italy UK Spain Japan Governments Corporates China Households Bank net external (% GDP) Source: McKinsey & Co for Households, Corporates (Q212 or latest); Fitch for governments, net bank external debt (212); Fitch est. for total China credit end-212

5 Global Economic Outlook Weak Recovery; Growth Forecasts Revised (Down) Global GDP Growth World Advanced (%) 1 Emerging Japan Source: IMF World Economic Outlook July Update 214 Growth Revisions Between 12/12 to 6/13 (pp) US Eurozone China Japan BRICs World Source: Fitch Global Economic Outlook

6 Abenomics: Can Wages, Investment Grow Sustainably? Business Confidence Wages Growth (Index) 3 Sentix (LHS) Shoko Chukin (RHS) (Index) 55 (% yoy) 2 Nominal Real /6 12/7 12/8 12/9 12/1 12/11 12/ /6 12/7 12/8 12/9 12/1 12/11 12/12 Source: CEIC, Fitch Source: CEIC, Fitch

7 Changing of Competitive Landscape EU/US bank deleveraging Political pressure to boost lending in home markets Many of the more international banks have support-driven IDRs but resolution regimes will lead to the erosion of sovereign support in the future Anticipate further improvement in financial profiles - Capital now sound, but regulation driving even larger buffers - Profit still subdued Selective pull-back or restraint (mostly by EU banks) from APAC markets so far but expected to expand again in APAC over the medium term APAC banks have been looking abroad in the region Expansion organically and inorganically Portfolio restructuring (expansion or divestment) Interest also in new frontier EM countries Varying degrees of financial capability and track record - Less attention on Basel 3 concerns, as the region is generally already compliant (or expected to be)

8 Key Macro Prudential Risk Indicators for APAC Country BSI Mar 7 Sep 7 Oct 8 Nov 9 Jun 1 Nov 1 Jun 11 Dec 11 Aug 12 Jan 13 Mongolia 3 3 China bb Hong Kong a Indonesia bb Sri Lanka Vietnam b Australia aa Korea bbb Singapore aa India bb Taiwan bbb Thailand bbb Japan a MPI: 3 = high vulnerability to potential systemic stress, 1 = low vulnerability BSI: Weighted average of Bank Viability Ratings in System Source: Fitch Macro-Prudential Risk Monitor

9 Rising Credit/GDP Ratio in Most APAC Markets (%) peak Trough to Australia China Hong Kong India Indonesia Japan Korea Malaysia Mongolia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Credit/GDP Note: China credit data excludes shadow financing Source: Fitch, central banks

10 Agenda Macro Environment Risks and Opportunities for Japan s Banks

11 Japan s Mega Banks: What s Driving the Ratings Fundamental improvements led to VR upgrades Further improvements expected (meeting future Basel 3 thresholds) Standalone profiles not uniform Mizuho s IDR still support-driven Stable Outlook predicated on Strong domestic franchises Executing stated plans to de-risk Pro-actively managing market risk BTMU: VR = a; IDR = A LT A+ SRF A A- BBB SMFG: VR = a-; IDR = A- A+ LT SRF A A- BBB Mizuho: VR = bbb+; IDR = A- Moderate offshore expansion (no major increase in risk appetite)

12 Abenomics: Major Uncertainties JPY Sustainable Economic Growth Trading Partners Inflation and Investment Competitive Corporate Sector Balancing the Budget JGB Yields Government Debt Ageing Population Consumption & Corporate Tax Asset Quality Direction of Indices Government Support prospects

13 Japan: Trade Partners Reliance on China and Other China-Dependent Countries Percentage of Trade Volumes 1% China HK Taiwan Korea Asia ANZ NA Europe Others 8% 6% 4% 2% % Export Import Export Import Source: JTIS Dec 21 Jun 213

14 Risk of JGB Holdings: Large Exposure Manageable Government Bonds/Total Assets a (%) StChartered (aa-) Nordea(aa-) Fitch s Stress Test Results Mega Banks Average FCC Ratio Under Stress Sep 12 (1yr JGB =.765%) a Japan banks at March 213, other banks at December 212. Source: JTIS Wells Fargo(aa-) State Street(a+) CA(a) ING(a) UniCredit(bbb+) FCC average +5bp (1.265%) +1bp (1.765%) +15bp (2.265%) Mega banking groups 9.3% 9.% 8.6% 8.3% Groupe BPCE(a) MUFG(a) SG(a-) BBVA(bbb+) Santander(bbb+) SMFG(a-) Mizuho(bbb+) BoC(bb) Duration Control Mitigates Risk (Yr) Mar 9 Mar 1 Mar 11 Mar 12 Mar 13 AFS at Cost: Exposure to Stabilise (% total assets) MUFG SMFG Mizuho City banks' current a/c with BOJ (RHS) MUFG (LHS) SMFG (LHS) (JPYtn) Mizuho (LHS) 4 5 Mar 8 Mar 9 Mar 1 Mar 11 Mar 12 Mar

15 Equity Investment: Further Reduction Limits Volatility Abenomics has been positive so far! Lower holdings, lower market volatility Reduction targets: 25% of Tier 1 MUFG: 25.4% at end-march 213 SMFG: 24.% Mizuho: 31.8% Exacerbates Profitability Fluctuation (JPYbn) PPOP Equity gains/losses 5 Recurring profit Mar 8 Mar 9 Mar 1 Mar 11 Mar 12 Mar 13 Jun 13 Source: Banks, Fitch Exposure (at Cost) Declining Gradually (% FCC) MUFG SMFG Mizuho Mar 1 Mar 11 Mar 12 Mar 13 Jun 13 and Volatility in Capital (% RWA) MUFG SMFG Mizuho Mar 8 Mar 9 Mar 1 Mar 11 Mar 12 Mar 13 Jun 13

16 Domestic Landscape: Little Attraction for Banks Lending has Ticked Upwards in 213 FYE8 FYE9 FYE1 (FYE8=1) FYE11 FYE12 FYE MUFG SMFG Mizuho Risk/Return Reward Evident in NIM? (%) MUFG SMFG Mizuho Corporate Funds Flow Drives Loans Change in capital Bond issuance LT debt ST debt Internal capital generation Depreciation (JPYtn) Net flow FYE3 FYE5 FYE7 FYE9 FYE11 FYE13 Fee Income to Supplement NIR (FYE8=1) MUFG SMFG Mizuho FYE8 FYE9 FYE1 FYE11 FYE12 FYE13 Note: Figures are each group's consolidated figures. Source: Banks, Fitch.7 FYE8 FYE9 FYE1 FYE11 FYE12 FYE13

17 Non-APAC Bank Deleveraging = Opportunities Deleveraging confined mostly to EU banks Pronounced in most markets, but already tapering US claims growth flat to modest Gaining share where foreign claims are falling Growing Japanese share of foreign claims Complement organic growth with stakes in higher-growth markets in APAC but more patient in EU Source: BIS, Fitch Share of Foreign Claims: US (USbn) (%) 8, 8 6, 4, 2, (USbn) Foreign claim (LHS) Japan (RHS) Europe (RHS) Q113 *Australia, Korea and Taiwan Share of Foreign Claims: Developed Europe Foreign claim (LHS) Developed APAC* (RHS) Japan (RHS) Europe (RHS) US (RHS) (%) Q113 *Australia, Korea and Taiwan Share of Foreign Claims: Developed APAC * (USbn) Foreign claim (LHS) US (RHS) Europe (RHS) Japan (RHS) Australia, Korea and Taiwan (RHS) (%) Q113 *Australia, NZ, Korea, HK, Macau, Singapore, Taipei Share of Foreign Claims: Emerging APAC * (USbn) Foreign claim (LHS) US (RHS) Europe (RHS) Developed APAC (RHS)** Japan (RHS) Q113 *Excl. Korea & Taiwan (DMs); **Austraila, Korea & Taiwan (%)

18 Mega Banks: Offshore Expansion APAC: A Loan Growth Engine (% total loans) FYE1 FYE11 FYE12 MUFG Others E. Europe W. Europe Latin America N. America Asia (ex Japan) FYE13 Overseas Loans: Enhancing NIM (%) MUFG (Jp) SMFG (Jp) Mizuho (Jp) MUFG (Ovs.) SMFG (Ovs.) Mizuho (Ovs.). FYE8 FYE9 FYE1 FYE11 FYE12 FYE13 FYE1 FYE11 FYE12 SMFGª FYE13 FYE1 FYE11 FYE12 Mizuho Overseas Loans: Fee Income Growth (FYE8=1) MUFG SMFG Mizuho FYE13 FYE8 FYE9 FYE1 FYE11 FYE12 FYE13 Note: Figures are each group's consolidated figures Note: Figures are operating banks non-consolidated ª Sumitomo Mitsui Banking Corporation (SMBC) non-consolidated. Source: Banks, Fitch

19 Competitiveness in Overseas Expansion: Pricing Cheaper Funding (5-year bond spreads) (bp) (%) BAC Barclays Global peers av. Mizuho MUFG SMFG Satisfactory Capital Levels FCC ratio BNPP Citi CS Deutsche Fully-loaded B3 CET1 GS HSBC JPMorgan (%) ROA (%) BNPP, HSBC and SG FCC ratios as of end-212, 'Look-through' Basel III CET1 ratio Q113; B3 RWA not disclosed by all banks; FCC includes completed capital raisings Sources: Fitch, Bloomberg, Banks MS SG UBS MUFG SMFG Mizuho Sound and Stable Asset Quality BAC 5 yr ave. Latestª MUFG Mizuho SMFG Global peer ave. a End-March 213 for mega banks. End-212 for global peers Lower Profitability Expectations (ROA) Barclays BNPP Citi CS Ave, Deutsche GS HSBC Latest JPMorgan MS SG UBS MUFG SMFG Mizuho

20 Offshore Expansion: Non-Organic Growth Date Name Country Stake acquired (%) MUFG Jun 28 Dah Sing Financial Holdings Limited Hong Kong 15. Oct 28 Morgan stanley US 21.8 Oct 28 Aberdeen Asset Management UK 18.8 Nov 28 UnionBanCal Corporation US 1. Apr 21 Tamalpais Bank US 1. Apr 21 Frontier Bank US 1. Nov 21 The Royal Bank of Scotland UK n.a. Apr 211 SWS MU Fund Management Co.,Ltd. China 33.3 Dec 212 Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) Vietnam 2. Apr 213 PB Capital Corporation (sub. of Deutsche Bank; U.S. commercial property loans) US n.a. Jul 213 Bank of Ayudhya Thailand max 75% SMFG Jul 28 Barclays PLC UK 1.4 Dec 28 KB Financial Group Korea 1.1 Jan 21 The Bank of East Asia Ltd. Hong Kong 9.5 Jun 21 Kotak Mahindra Bank Ltd India 4.5 Jan 212 Moelis & Company US n.a. Jan 212 The Royal Bank of Scotland (aircraft leasing assets) UK n.a. Mar 212 PT Indonesia Infrastructure Finance Indonesia 14.9 Apr 212 China Post & Capital Fund Management Co.,Ltd China 24. May 213 BTPN Indonesia (max 4%) Mizuho Jan 28 Merrill Lynch & Co., Inc ( converted to a stake in Bank of America) US n.a. Aug 28 Evercore Partners Inc US 14.7 Nov 21 BlackRock, Inc. US n.a. Aug 211 PT Imora Motor/PT Balimor Finance Indonesia 51. Sep 211 Vietcombank Vietnam 15. Jun 212 West LB Brasil Brazil 1.

21 Japanese Banks: Challenges of Expansion Credit and operating risks Limited track record in target markets Limited funding ability (i.e. wholesale versus retail) FX Control and governance Management resources More aggressive expansion increases burden on management Shareholder expectations compromise prudence in return for growth Increasing complexity Compliance/reporting costs (regulatory frameworks differ across countries) Cultural differences Basel 3 Full deductions for large minority stakes What if impairments coincide with future target minimum capital thresholds?

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