• Bloomberg


Japanese banks’ credit ratings and share prices may decline as global regulators consider measures that seek to avoid the use of public funds to rescue failing lenders, Mitsubishi UFJ Morgan Stanley Securities Co. said.

“The prices of some of Japan’s major bank stocks could fall by over 20 percent once expectations of capital injections and other forms of government support disappear,” Junsuke Senoguchi, a senior analyst at MUFJ Morgan Stanley, wrote in a report. The absence of a public backstop would lower banks’ credit ratings and drive funding costs higher, eroding profitability, he said.

Under draft proposals made by the Financial Stability Board last month, creditors would have to share a greater burden following a bank’s collapse to shield taxpayers from rescuing the lender.

Global regulators want investors to avoid assuming governments will again rescue banks, after the 2008 failure of Lehman Brothers Holdings Inc. led the U.S. and Europe to inject public funds into financial firms to prop up the banking system.

Japanese bank share prices take into account the assumption that lenders can depend on government funding should they fail, Senoguchi wrote in the report to clients.

Mizuho Financial Group Inc. relies most on potential government support among the country’s three biggest banks so its stock has the most to lose should investors come to expect that public aid won’t be available, according to the report.

Shares of Mizuho, Japan’s third-biggest bank by market value, have a “downside potential” of 21 percent, more than Mitsubishi UFJ Financial Group Inc.’s 7.5 percent and Sumitomo Mitsui Financial Group Inc.’s 12.4 percent, it said.

Takashi Natsui, a spokesman for Tokyo-based Mizuho, declined comment when asked about the contents of the report.

Mounting public debt is making it difficult for governments around the world to devote large amounts of taxpayer funds to rescue banks, said Senoguchi, who was hired in January and previously worked at the Bank of Japan, where he examined lenders.

Credit rating companies assume Japan’s major banks receive “substantially greater government support than their overseas counterparts,” he said.

Moody’s Investors Service put Japanese banks’ credit ratings on review for possible downgrade May 31, saying the swelling fiscal burden may make it harder for the government to help lenders in times of financial trouble. A review means a decision is likely within three months.

The Financial Stability Board’s stance underscores that “the trend is for government support to weaken,” Minoru Kubota, managing director at Moody’s in Tokyo, said by telephone. “We’re now monitoring the situation before making a decision whether to downgrade or not.”

Moody’s rates Mizuho’s two banking units at Aa3, the fourth-highest investment grade. Their standalone credit quality — without accounting for potential government support — is six notches lower at Baa3, the lowest investment grade. Banking units of Mitsubishi UFJ and Sumitomo Mitsui are Aa2, and their standalone ratings are four steps lower.

Japanese banks received taxpayer funds after the collapse of an asset bubble triggered a financial crisis in the late 1990s. The Deposit Insurance Corp. of Japan injected ¥12.7 trillion into lenders from 1998 to 2010, and ¥1.9 trillion has yet to be paid back, according to the agency’s website.

The FSB, which brings together watchdogs from the Group of 20 nations, said in its consultative document on July 19 that the so-called bail-in of creditors would “foster market discipline by countering the expectation that public funds will be used to support failing financial institutions.”

The board will submit its final recommendations to G-20 leaders at a summit in Cannes, France, starting Nov. 3. It is then up to regulators in individual countries to decide how to implement the proposals, including by changing laws, Senoguchi said.

While the document has yet to have a major impact on Japanese banking shares, as the summit nears “it’s likely that the stocks of major banks with comparatively low credit ratings will post relatively weaker performances,” he said.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.