Negative interest rates to hit Japan Post Bank hard as bond yields plunge

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Japan Post Bank Co. stands to lose the most from the Bank of Japan’s decision to introduce negative interest rates as plummeting bond yields underscore its reliance on the country’s debt for income.

The postal bank, one of the biggest holders of Japanese government bonds, gets more than 90 percent of its profit from interest income, according to Shinichiro Nakamura, a Tokyo-based senior analyst at SMBC Nikko Securities Inc. He sees the company’s earnings taking a bigger hit from the BOJ’s action than the nation’s three so-called megabanks, which unlike Japan Post have been expanding abroad and diversifying into fee businesses.

“Domestic yields will deteriorate due to the introduction of negative interest rates,” Nakamura said by phone. “And the larger the proportion of domestic interest income in profit, the larger the negative impact.”

Yields on Japan’s benchmark 10-year sovereign notes fell below zero for the first time, touching a low of minus 0.035 percent Tuesday in Tokyo.

Japan Post Bank, which went public as part of a ¥1.4 trillion initial public offering in November, has also parked almost a fifth of its assets at the BOJ. Central bank Gov. Haruhiko Kuroda last month announced the surprise decision to charge 0.1 percent interest on some of the banks’ reserves.

Negative rates could cut Japan Post Bank’s ordinary profit by 20 percent, based on assumptions for earnings in the year ending in March, Nakamura wrote in a report on Feb. 1.

That compares with about 10 percent for regional banks and 5 percent for Mitsubishi UFJ Financial Group Inc. and the other megabanks, according to Nakamura’s estimates.

“The banks that will be most affected will be those that have lower diversification of earnings,” said Mac Salman, head of research on Japanese financial firms at Jefferies Group LLC in Tokyo. “In many ways, what’s happened with negative interest-rate policy validates banks’ strategies of aggressive diversification away from domestic core banking business.”

Shares of the postal bank have tumbled 20 percent since the BOJ’s announcement on Jan. 29, and the Topix Banks Index has lost 21 percent.

The stock has dropped 13 percent since it listed in November as part of the nation’s biggest privatization deal this century, dealing a blow to investors — mostly Japanese individuals — who flocked to the IPO.

Satoshi Yamada, a spokesman for Tokyo-based Japan Post Bank, declined comment.

Since its listing, the postal bank has said it will diversify its ¥205 trillion in investments away from JGBs to improve returns. It has been adding riskier assets, including equities and foreign bonds, to a so-called satellite portfolio that has risen to ¥56 trillion as of September.

Even after trimming its JGB holdings to a record-low ¥92.8 trillion, the assets still made up about 45 percent of its portfolio in September. Unlike other private-sector banks, Japan Post Bank’s alternatives are limited because its ability to lend is restricted. And unlike the three megabanks — MUFG, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — it gets all of its revenue from home.

While Japan Post Bank has steered some of the funds made available from shedding its JGB holdings into instruments such as foreign bonds, it has also put a portion at the central bank, earning 0.1 percent interest. Deposits at the BOJ and other cash-equivalent assets have risen to about 19 percent of the portfolio as of September. With the new easing, the company will have to pay the BOJ 0.1 percent on additional reserves.

Japan Post Bank, the nation’s biggest holder of customer deposits, may also face pressure to diversify investments because of an increase in the amount of cash that savers are allowed to leave at the company.

In December, a government panel recommended that the deposit cap be raised to ¥13 million per account from the current ¥10 million.

“One option for Japan Post is to invest in foreign bonds and equities as funds in JGBs mature, and they’re making progress in the strategy to diversify their satellite portfolio now,” said SMBC Nikko’s Nakamura. “But they’ll need to do this at a quicker pace.”