Roadblocks ahead for Japanese banks as credit costs balloon

NPLs will rise as SME default rates stack up.

Japanese regional banks will see their profits slide down this year as COVID-led economic disruptions pushed credit costs up and eroded asset quality, according to a Moody’s report.

Whilst both segments showed strength in FY2019, nonperforming loan (NPL) ratios are expected to surge as default rates amongst SMEs pile up, said analyst Tomoya Suzuki.

The average NPL ratio of the 12 rated regional banks went almost unchanged at 1.6% at end-March, but strains to SMEs’ cash flows and rising unemployment will hurt borrowers’ repayment capabilities.

Profitability tanked in FY2019 with more than 70% of listed regional banks reporting net income downturns or net losses for the year, primarily on the back of elevated credit costs and losses in securities investments. The listed lenders’ average return on assets slipped to an average of 0.14% from 0.18% in the previous fiscal year.

Moody’s foresees that decaying profitability and capitalisation will accelerate consolidation amongst regional banks, as mergers can be seen as an option to boost viability.

Liquidity will remain agile as the Bank of Japan’s loan programme facility will enhance funding and liquidity profiles. Deposit growth rose to about 4% in May compared to the same period last year, which is likely to continue in the near term as businesses choose to save excess cash.

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