Mizuho Financial Group Inc. is extending riskier types of corporate credit to fend off competition in a country that’s awash with easy money.
Japan’s third-largest bank by market value will offer companies more subordinated loans and other types of mezzanine finance, said Koji Fujiwara, CEO of the firm’s main lending unit. “We will definitely increase it,” he said in an interview.
Banks in Japan are looking for ways to boost profitability as negative interest rates squeeze net interest margins. Mizuho has been expanding a pool of what it calls “risk money” to earn higher returns than plain loans and deepen relationships with corporate customers.
“By stepping into risk sharing with clients, I think we can get closer to their strategic business decisions,” Fujiwara said.
Mezzanine finance, which can include preferred shares, gets repaid later in times of borrowers’ distress. While such finance costs more than regular loans, it can be counted as capital, allowing borrowers to maintain or improve their credit ratings.
Mizuho plans to spend ¥1.45 trillion ($13.4 billion) in equity and mezzanine investments and loans for the fiscal year ending March 2020, up from ¥1.28 trillion in 2019, it said in a presentation earlier this year.
Fujiwara said the bank’s practice in recent years of trimming shareholdings in corporate clients will free up capital needed for risk money, a category that also includes investments in startups, infrastructure and private equity funds.
Tokyo-based Mizuho had a common equity tier 1 capital ratio of 12.37 percent at the end of June, lower than those of Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc.
Japanese banks have been reducing holdings of corporate clients’ stocks, which were owned to cement business ties but criticized as hampering governance. Mizuho has shed more than 25 percent of its cross-shareholdings in the past four years to about ¥1.4 trillion.
“In the past, we used our capital for cross-shareholdings,” he said. “We are changing how we use our capital and taking risks that have been difficult for us to take before.”