Sumitomo Mitsui Financial Group Inc. is seeking as many as six new hires for a team specializing in underwriting bonds issued by banks that would insulate taxpayers from costs if the lenders later fail.
The pickings are slim.
SMBC Nikko Securities Inc., the investment banking arm of Japan’s second-largest lender, expanded the team in March that manages debt sales by financial institutions, said Shunshi Kira, the head of the capital markets division. SMBC’s parent is preparing its first bond that can count as higher-level capital under Basel III banking rules, while four overseas banks have debuted similar yen-denominated notes since December.
“We’re going to see explosive growth in this business,” Kira said in an interview in Tokyo. “Each brokerage views this strategically, and they’re keeping a tight hold on staff.”
The 30 biggest global banks may need to raise as much as $700 billion by selling securities that can absorb losses in a crisis to ensure investors rather than taxpayers foot the bill for financial failure, according to Credit Suisse Group AG.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui, and Mizuho Financial Group Inc., Japan’s three largest lending groups, are all preparing to issue loss-absorbing yen bonds as early as this month.
Kira said SMBC would like to add a minimum of two or three members to its 10-person financial institutions debt team, and a maximum of six. He said he’s seeking bankers who have knowledge of structuring and can also undertake non-yen deals.
“If we can hire, I would like to, but in reality it will be difficult,” Kira said.
“Bankers who can handle underwriting for global financial institutions are already entrenched at each of the brokerages and it would be hard to recruit them. And it would be tough for those that have retired to catch up on all the new rules.”
Mizuho Securities Co. has been gradually boosting staff at its financial institutions deals team, and is seeking mandates from domestic banks, insurers, and overseas issuers, said Yutaka Fukushi, head of global capital markets.
Mitsubishi UFJ Morgan Stanley Securities Co. underwrote the first domestic Basel III-compliant bank bond last year, and will seek to steadily increase deals, said Hajime Suwa, the head of debt capital markets in Tokyo.
The Financial Stability Board proposed last year that the world’s biggest banks, including Japan’s top three, be required to hold subordinated debt and other
loss-absorbing instruments equivalent to as much as a fifth of their risk-weighted assets.
Japan’s lenders have pushed the global regulator to delay the introduction of the solvency rules planned for January 2019 because they may not have time to issue the new debt needed to comply. Setting the level at 16 percent of risk-weighted assets is “more than sufficient,” the Japanese Bankers Association said in February.
The nation’s banks have sold more than $10 billion in bonds counting as capital since March of last year, joining overseas borrowers in issuing about $574 billion since 2010.
Mitsubishi UFJ sold the nation’s first Tier 1 bonds in March, offering yields for higher risk of future writedown in crisis than Tier 2 notes. Sumitomo Mitsui and Mizuho are currently planning similar debt sales.
Credit Agricole SA became the fourth overseas bank to sell Basel III-compliant Samurai bonds last month, in the first such sale that combined subordinated and senior yen debt. It sold ¥ 39.9 billion ($330 million) of subordinated debentures maturing in 10 years paying a yield premium of 145 basis points over yen swaps. That was five times the spread on senior ¥2,025 debt it offered the same day.
The average extra yield on Japanese corporate bonds was nine basis points more than swaps as unprecedented central bank debt purchases drag down borrowing costs.
The mega-banks “haven’t issued much in the way of Basel III eligible capital” and are likely to boost global sales as older debt mature or become ineligible, said David Marshall, a credit analyst at CreditSights Inc. in Singapore.
“Although domestic is definitely cheap for them, the banks will want to maintain a more diversified investor base.”
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