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Megabanks’ $800 billion cash pile shows Abe must free up credit

Bloomberg

Prime Minister Shinzo Abe has succeeded in wrestling down the yen and snapping a 15-year deflationary spiral. The challenge of spurring lending by the country’s cash-hoarding megabanks remains.

The nation’s three largest lenders increased their cash and deposits with other financial institutions 5.7 percent in the quarter to June to ¥82 trillion from the previous three-month period, earnings data show. New loans by Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. fell ¥329 billion to ¥239.1 trillion.

Abe needs to spur lending after the world’s third-largest economy shrank at an annualized 6.8 percent in the second quarter due to an April sales-tax increase aimed at curbing the world’s biggest debt burden. While the banks can no longer park excess cash in sovereign debt amid expectations for higher yields, falling loan rates have narrowed the spread over deposit payments to levels that discourage extending credit, according to Moody’s Investors Service.

“The big three are at a turning point,” said Graeme Knowd, an associate managing director who oversees corporate and financial institutions at Moody’s in Tokyo, in an interview. “They haven’t really taken credit risk for a long time. If ‘Abenomics’ works, they need to reorient the business model.”

Deposits at Japanese financial institutions exceeded loans by ¥192.5 trillion last month, according to Bank of Japan data. The surplus reached a record high ¥194.2 trillion a month earlier.

Cash and funds held at lenders soared ¥47.4 trillion since March 2013, a month before the central bank introduced its stimulus program. Reserves at the BOJ in excess of the minimum requirement, which pay 0.1 percent interest, rose ¥82.3 trillion in the period to ¥134.9 trillion, as of Aug. 12.

Abe’s policies and the BOJ’s about ¥7 trillion in monthly sovereign bond buying succeeded in depreciating the yen more than 18 percent last year. The infusion also reduced borrowing costs in the country, forcing banks to charge lower interest.

New loan rates dropped to 0.779 percent in May, the lowest in BOJ data going back to 1993, before rising to 0.905 percent in June. The spread on what Mitsubishi UFJ charges for domestic loans over deposit interest rates fell to 0.96 percent in the first quarter, a record low.

“Japan’s banking sector is a little bit unusual,” said David Marshall, a credit analyst at CreditSights Inc. in Singapore. “They’re more risk averse, only willing to take on what they see as the good quality clients and they have been reluctant to lend to weaker companies.”

While some companies in Japan are spending more on capital investments, their cash levels remain high and so it will take time before demand for bank loans increases, Tomoyuki Narita, a spokesman for Sumitomo Mitsui said in an email. Mitsubishi UFJ’s spokesman Takafumi Miyamoto said the bank is actively seeking to engage borrowers.

“Although we continue to make efforts to increase lending, a real rebound in funding demand will take a little bit more time,” Mizuho spokeswoman Masako Shiono said in an emailed response to questions. “We are hopeful for a recovery in the fiscal second half starting in October.”

Lending in Japan increased to ¥414.7 trillion in July, the highest level since March 2003, according to data compiled by Bloomberg. The additional income from new loans still fell short of what the banks made on bonds and equities.

Sumitomo Mitsui increased interest income from loans by ¥7 billion in the most recent quarter from a year earlier, according to calculations by CreditSights. That compares with a ¥32.7 billion gain on equities and a ¥12 billion net gain on bonds.

Japan’s benchmark 10-year bonds yielded 0.5 percent as of 9:29 a.m. Thursday in Tokyo, down 23.5 basis points this year. The Topix stock index has fallen 2.7 percent since Dec. 31, after a 52 percent gain in 2013.

Banks have also turned to more lucrative overseas markets to escape low rates at home. Mitsubishi UFJ boosted loans abroad by ¥8.4 trillion since March 2013, compared with a ¥1.3 trillion increase in corporate lending at home.

“The banks are basically on the sidelines until it becomes clearer what the outcome is going to be” of Abe’s policies, CreditSights’ Marshall said.