Big Japanese banks bulging at the seams with pent-up cash – Nikkei Asian Review

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TOKYO — Total assets at five major Japanese banking groups have risen to a new height amid anemic domestic loan demand and a dearth of attractive investment options.

Assets at the country’s three megabanks — Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group — and the smaller Sumitomo Mitsui Trust Holdings and Resona Holdings reached nearly 820 trillion yen ($7.43 trillion) in the April-June quarter.

An increase in cash deposits played a major role, as companies riding strong earnings stashed more funds in banks, and consumers worried about their financial future did the same. SMFG saw a deposit increase of about 1.3 trillion yen in the quarter. But only a relatively small portion of deposits  — in the 20% range for the five banks — has been invested in securities amid interest rates depressed to historic lows by the Bank of Japan’s negative interest rate policy.

Instead, the bulk of the money has gone into reserve accounts at the BOJ. The five groups’ cash and cash due from banks — the balance sheet item that captures BOJ deposits —  reached about 196 trillion yen at the end of June, an increase of 34 trillion yen from the end of March 2016. This item accounted for 24% of total assets, up 20 percentage points from a decade earlier.

Shifting tide

But signs of change are emerging. Mizuho, for one, slashed its cash and cash due by around 5.3 trillion yen in the April-June quarter.

The BOJ deposits of the five groups have so far not been subjected to negative interest rates, but that could happen if the amounts keep rising. Mizuho appears to have acted in advance to prevent that from happening.

If banks’ profit growth does not catch up with that of their balance sheets, return on assets could suffer. Banks are fretting over this prospect, but their options are limited by lackluster demand for loans, their main source of earnings. Over the three months through June, their aggregate lending balance tumbled by about 1.7 trillion yen.

No refuge in government bonds

Investment options are also scarce. “At these interest rate levels, investing in JGBs isn’t an easy option,” a megabank executive said of Japanese government bonds. U.S. Treasurys also lack appeal because of looming Federal Reserve interest rate hikes.

SMFG and Mizuho did increase bond investment in the April-June period. But the five groups’ ratio of security holdings to deposits came to slightly more than 24% at the end of June, around the lowest in a decade.

With rapid lending growth unlikely, only curbing deposits will help banks avoid piling up assets. Their predicament exemplifies a longtime challenge faced by the Japanese economy of spurring corporate investment and encouraging individuals to move money out of savings and into real assets.

The five groups’ net profit for the April-June period rose 23% on the year to 726.2 billion yen, growing for the first time in two years. Lending and commission income from mutual fund sales were lackluster, and net interest income shrank at MUFG and two other groups. But gains on equities shot up 330% on the year to 126.9 billion yen, lifted by unwinding cross-shareholding ties.

For the full year ending in March, all five groups kept their earnings forecast unchanged. Their aggregate net profit is expected to reach 2.43 trillion yen, putting their first-quarter results about 30% of the way there.

(Nikkei)

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