Moody's up­grades Ja­pan’s bank­ing sys­tem out­look

The Pak Banker - - Front Page -

TOKYO

Global rat­ing ag­necy Moody's Ja­pan K.K. has re­vised its out­look on Ja­pan's bank­ing sys­tem to sta­ble from neg­a­tive.

The re­vi­sion was prompted by the sta­bil­ity ev­i­dent in the banks' oper­at­ing en­vi­ron­ment, as­set qual­ity and cap­i­tal, as well as fund­ing and liq­uid­ity.

The change is the first since the neg­a­tive out­look was as­signed in 2008.

Global rat­ing ag­necy Moody's an­nounce­ment was con­tained in its just- re­leased an­nual "Bank­ing Sys­tem Out­look: Ja­pan", which ex­presses our ex­pec­ta­tions for the fun­da­men­tal credit con­di­tions in the sys­tem over the next 12-18 months.

The new re­port notes mod­est but above-trend eco­nomic growth, as as­sumed in Moody's base­line sce­nario for the com­ing 12-18 months, con­tribut­ing to the sta­ble oper­at­ing en­vi­ron­ment.

Moody's also views as­set qual­ity and cap­i­tal as sta­ble as we do not ex­pect non-per­form­ing loans (NPLs) to rise sig­nif­i­cantly de­spite the ex­pi­ra­tion in March 2013 of gov­ern­ment mea­sures to sup­port lend­ing to smal­land medium-sized en­ter­prises. In­deed, the banks' as­set qual­ity met­rics are good rel­a­tive to their global peers, and their cap­i­tal ra­tios are also strong.

The re­port notes that the third fac­tor, fund­ing and liq­uid­ity, is a strength of the Ja­panese bank­ing sys­tem, and ex­pects pri­vate-sec­tor de­mand for de­posits to re­main strong, while growth in over­seas lend­ing will re­sult in only a mi­nor in­crease, if any, in the banks' re­liance on whole­sale fund­ing.

The cur­rent oper­at­ing en­vi­ron­ment pro­vides im­proved op­por­tu­ni­ties for growth in do­mes­tic and in­ter­na­tional loans. A re­turn to above­trend pos­i­tive growth in nom­i­nal GDP for Ja­pan is sup­port­ive of a con­tin­ued re­cov­ery in do­mes­tic loan growth.

At the same time, on­go­ing delever­ag­ing by global com­peti­tors, par­tic­u­larly the Euro­pean banks, has re­sulted in greater op­por­tu­ni­ties for Ja­panese banks to grow their over­seas loan books.

How­ever, the re­port sees sev­eral risks to Moody's base­line eco­nomic sce­nario. These in­clude the sen­si­tiv­ity of Ja­pan's ex­ports to ma­jor uncer­tain­ties in global de­mand; the pos­si­bil­ity that a planned rise in the con­sump­tion tax may lead to volatil­ity in con­sump­tion; and ap­pre­hen­sion that fun­da­men­tal do­mes­tic con­cerns -rang­ing from en­ergy se­cu­rity to the coun­try's age­ing de­mo­graph­ics -may ex­ac­er­bate the hol­low­ing out of Ja­pan's in­dus­trial base.

Fur­ther­more, the low in­ter­est rate en­vi­ron­ment re­sults in struc­turally weak net in­ter­est in­come, and al­though the banks are try­ing to in­crease non-in­ter­est in­come, they have not been suc­cess­ful in fully off­set­ting the de­cline in net in­ter­est in­come.

The an­nual out­look fur­ther notes that se­lec­tive over­seas ex­pan­sion, both or­ganic and through ac­qui­si­tions, is in­creas­ing the diver­sity of rev­enue sources for the banks. For ex­am­ple, over­seas lend­ing now ac­counts for 15-20% of the three Ja­panese mega-bank­ing groups' to­tal lend­ing and is still grow­ing.

Moody's as­sess­ment of this growth so far is, on bal­ance, pos­i­tive as we rec­og­nize the po­ten­tial for im­proved mar­gins and im­proved con­tri­bu­tions to as­set di­ver­si­fi­ca­tion on a ge­o­graphic ba­sis.

The re­port notes the con­tin­ued strong will­ing­ness and abil­ity of the Ja­panese au­thor­i­ties to pro­vide sup­port to trou­bled banks -- a credit pos­i­tive. In this con­text, Ja­pan has a com­pre­hen­sive set of reg­u­la­tions and tool kit to pro­vide pub­lic sup­port to the fi­nan­cial sys­tem, when nec­es­sary.

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