Just like the 80s: Japan’s banks lead world lending again

Also, the LBO market – a mainstay of many foreign banks’ portfolios – had never really got all that entrenched in Japan, so that market’s disappearance has had little impact on volumes. And finally, Japanese companies do tend to raise more money in the first quarter of the calendar year since it is also the last quarter of the fiscal year, and they want to secure funding before that fiscal year ends.

While this explains a lot, none of it suggests a period of sustainable growth in Japanese loans any time soon. Corporate performance is declining in Japan – GDP shrank 4% in the first quarter – and consequently companies are likely to have little need to raise funds for capital expenditure. Defaults are rising, although syndicate bankers don’t appear especially concerned by this. “The number of breaches in covenants may increase, but I don’t think it necessarily has a big negative effect on our business,” says Takenori Hoshi, deputy general manager in the global syndicated finance unit at Mizuho. “If covenants are breached, we will try to coordinate between the borrower and the investors to avoid unnecessary acceleration.” Instead, momentum is likely to come from the Y3 trillion of bonds that are due to be refinanced this year, most likely through the loan markets.

There is an exception to the home-grown trend: Mitsubishi UFJ Financial Group, whose second half deal proceeds were 24% overseas (9% Americas, 14% EMEA and 1% Asia), comfortably the biggest proportion for a Japanese bank. Sato puts this partly down to the fact that, at all levels, overseas businesses represent more revenue for MUFG than the other two; and partly to collaborations with Morgan Stanley and with Union Bank of California – a bank it took full control of in 2008 in a transaction somewhat overshadowed and forgotten by the Morgan Stanley deal. Sato says overseas experience “will be very advantageous for us going forward” and highlights Asia. “In the Asian market there are many financing needs especially among the manufacturers, and we think we will be able to take advantage.” The margins are certainly better here: Sato reckons that in Japan the spreads for a typical AA loan might have gone from single digits to 25-30 basis points, for the same company overseas it’s more like 80 to 90.

Will others follow? “There are many foreign companies that might want to raise capital in the Japanese market, and for Japanese institutions in the domestic market it is unlikely that demand will increase as much as they expect and hope for,” says Tadokoro. “So Japanese financial institutions need to increase their diversification. They are very reluctant to do so by themselves but feel more comfortable lending in syndication, so loans for overseas companies in the Japanese market will increase in future.”

A counterpoint to this debate, though, comes in the financial health of the Japanese banks themselves. Measured by equity to assets, capital adequacy seems absurdly low at Japanese institutions by world standards: based on third quarter fiscal 2008 numbers (that is, December 31 2008), Mizuho’s capital adequacy was just 2%, Sumitomo Mitsui’s 2.7% and Mitsubishi UFJ 4%. Sato highlights this as an area of relative strength – “capital adequacy will affect the aggressiveness of activity for the megabanks, and by utilising our advantage we should be able to expand our business” – but even there the adequacy figure is not high. Macquarie Research analyst Ismael Pili says “NPL formation should accelerate this year with the rate hitting as high as 4.4% and provisions to loans hitting 84 basis points” and notes that “NPLs tend to lag the onset of an economic slowdown,” meaning there is more pressure to come for the banks.

Shinichi Ina at Credit Suisse characterised 2008 as “terrible” for the banks and is alarmed by the root causes of big net losses at the megabanks. “The primary causes are a sharp fall in their investment shareholdings and an increase in credit costs centred on their real estate exposures,” he says. “Both are risks that hung heavily over the Japanese banking system through the lost decade. It is as if someone with a disease in remission, finally, after several years of quiescence, suffered a recurrence.”

In the meantime, though, Japanese banks continue to look healthier than many western counterparts and their newfound leadership of global lending is likely to remain in place for the remainder of the year. The real question, though, is whether Japanese banks beyond MUFG do decide to treat western reluctance as an opportunity and shift more of their arranging attention to the rest of the world. As Yoshihiro Ikeda, senior vice president and head of the planning group in Sumitomo Mitsui’s international banking unit, says: “We have a chance. Japanese banks can represent a dramatically increased presence in that market from now on. But we are doing it very cautiously.”

Author’s note: to see this article in its published form, visit http://www.euromoney.com/Article/2229331/CurrentIssue/72159/Japans-banks-open-lending-taps.html

Author’s note: this article appeared alongside another on Japan. See it here: http://chriswrightmedia.com/