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[TOKYO] Japan's biggest banks have begun including their smaller regional peers in overseas project financing deals - a development pushed for by financial authorities keen for regional lenders to reduce their outsized dependence on government bond investments.
Japan has more than 100 regional banks whose combined deposits account for about half the country's, but with local economies shrinking as their populations age and loan demand tepid, they have little alternative but to invest in government debt.
Those bond investments now total 40.8 trillion yen (US$400 billion), equal to about 8 per cent of gross domestic product. Regulators worry that if there were sustained increases in interest rates or a tapering of bond buying purchases by the central bank, the subsequent drop in the value of their bond portfolios could result in large unrealised losses.
While current interest rates are low, eagerness to cut that risk has prompted Japan's Financial Services Agency to intervene and suggest banks such as Sumitomo Mitsui Financial Group actively involve regional lenders in overseas project financing given its better yields, banking sources say. "The FSA is tapping megabanks to share their overseas assets or lending with regional banks as regional banks don't have sufficient know-how to expand their business outside Japan on their own," an executive at a regional lender told Reuters.
The executive declined to be identified as his discussions with megabank officials were private. An official with the FSA's bank examination unit declined to comment when asked if the agency was urging megabanks to help regional lenders in this respect.
For Japan's big banks, roping in regional peers helps them spread out risk. In return regional banks, which don't have the experience in properly assessing credit risks of overseas borrowers or even enough staff with sufficient English skills, get to rely on megabanks' expertise.
A recent scheme devised by Sumitomo Mitsui's core banking unit involves shifting overseas project financing bonds into a trust account to which regional banks then lend to. Iyo Bank Ltd and 77 Bank Ltd were the first lenders, providing a combined 40 million yen (US$340,000) in financing.
The scheme was made possible by the FSA doing away with a requirement that each lender make their own assessments of borrowers' credit risks. Sumitomo Mitsui also plans to woo insurance companies and pension funds as well as regional lenders.
In a separate initiative led by Mitsubishi UFJ Financial Group (MUFG), Bank of Yokohama Ltd and some 13 other regional lenders provided US$300 million in financing, around 60 per cent of the total, for a Vietnam highway project.
Participating banks have been protected from default risks because a quasi government body for export insurance has provided coverage the loans - guarantees that MUFG secured from authorities that enabled regional banks to take part, financial sources said. "These schemes benefit both megabanks and regional lenders and are a win-win situation," said Shinichi Tamura, an analyst at Barclays Capital. "But it won't solve all of the difficulties associated with regional lenders' portfolios - that's a problem that needs to be chipped at steadily." While some regional lenders like Iyo Bank see these efforts as stepping stones to one day being able to participate in overseas project financing without megabank help, not all see the developments as a golden opportunity. "I don't think that megabanks are really interested to part with assets worth having and I'm not inclined to buy into this,"the executive at the regional lender said.