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Fitch: BoJ's Actions Could Add to Risks Faced by Japanese Banks
October 3, 2016 / 2:06 AM / 10 months ago

Fitch: BoJ's Actions Could Add to Risks Faced by Japanese Banks

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(The following statement was released by the rating agency) TOKYO/SINGAPORE, October 02 (Fitch) The Bank of Japan's (BoJ) latest measures are unlikely to ease pressure on bank profitability, but add to the risks faced by financial institutions - and could end up undermining efforts to boost the economy, says Fitch Ratings. The more complex these measures become, the greater the potential for unintended consequences, such as the impairment of the financial system's role in the transmission of monetary policy. Japanese bank profitability is being eroded by a number of factors, and the BOJ's measures in September came in recognition of the pressures brought about by negative interest rates. The weak domestic economy has kept loan demand subdued - which, on top of the fierce competition among financial institutions, has dragged on earnings. Moreover, the continued strengthening of the yen in the face of BoJ easing has added to the pressure on both banks and corporates in Japan. Banks' net interest margins (NIMs) have fallen steadily since 2010, most recently as a result of the BoJ's negative interest rate policy which has flattened the yield curve further. The average NIM of the three Japanese "mega banks" - MUFG, SMFG and Mizuho - has been on a downward trend for the last six years, and fell to just 0.9% in the fiscal year ending March 2016. The regional banks are likely to have been squeezed even more, since the mega banks benefit from broader diversification that makes them less sensitive to margin pressure. The BoJ at its September meeting tried to address yield-curve flattening to support banks' NIMs. Fitch feels the new framework is designed to pave the way for further policy rate cuts. It will target 10-year Japanese government bond (JGB) yields, which have been negative for much of this year but will now be kept close to 0%. We think it is unlikely that this form of yield-curve control will do much to boost bank profitability, since interest rates on only a relatively small proportion of bank lending are sensitive to 10-year bond yields. The majority of bank lending has an interest-rate renewal period of less than one year. In light of these factors, banks are unlikely to be spurred into lending more aggressively by the new policy framework, and the BoJ could be forced to make further alterations to try to boost the economy. We already expect the policy rate to be cut from -0.1% to -0.5% by end-2017, which would put additional pressure on banks' NIMs. The BoJ's steps into the unknown could even lead to banks becoming more cautious and bulking-up their absorption buffers with extra capital. Distortions in the bond market could be particularly dangerous for banks, which would be vulnerable to mark-to-market shocks if a normalisation of the bond market ever results in a sharp rise in yields. Regional banks look the most at risk, given that they have not reduced JGB holdings in the last few years, unlike the mega banks. Contacts: Kaori Nishizawa Director Financial Institutions +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3rd Floor 4-8 Kojimachi, Chiyoda-Ku Tokyo, 102-0083 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 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. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. 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. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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