Japan Post Bank seen hurting most from Bank of Japan's negative rates

Tokyo

JAPAN Post Bank Co stands to lose the most from the Bank of Japan's (BOJ) decision to introduce negative interest rates as plummeting bond yields underscore its reliance on the country's debt for income.

The postal bank, one of the biggest holders of Japanese government bonds (JGBs), gets more than 90 per cent of its profit from interest income, according to Shinichiro Nakamura, a Tokyo-based senior analyst at SMBC Nikko Securities Inc. He sees the company's earnings taking a bigger hit from the BOJ's action than the nation's three so-called megabanks - which, unlike Japan Post, have been expanding abroad and diversifying into fee businesses.

"Domestic yields will deteriorate due to the introduction of negative interest rates," Mr Nakamura said. "And the larger the proportion of domestic interest income in profit, the larger the negative impact."

Yields on Japan's sovereign notes with maturities as long as nine years have turned negative, while the level for the benchmark 10-year security touched a record-low zero per cent on Tuesday in Tokyo. Japan Post Bank, which went public as part of a 1.4 trillion yen (S$17 billion) initial public offering (IPO) in November, has also parked almost a fifth of its assets at the BOJ. Central bank governor Haruhiko Kuroda last month announced the surprise decision to charge 0.1 per cent interest on some of banks' reserves.

Negative rates could cut Japan Post Bank's ordinary profit by 20 per cent, based on assumptions for earnings in the year ending March, Mr Nakamura wrote in a report on Feb 1. That compares with about 10 per cent for regional banks and 5 per cent for Mitsubishi UFJ Financial Group Inc and the other megabanks, according to Mr Nakamura's estimates.

"The banks that will be most affected will be those that have lower diversification of earnings," said Mac Salman, head of research on Japanese financial firms at Jefferies Group LLC in Tokyo. "In many ways, what's happened with negative interest rate policy validates banks' strategies of aggressive diversification away from domestic core banking business."

Shares of the postal bank have tumbled 19 per cent since the BOJ's announcement on Jan 29, and the Topix Banks Index has lost 20 per cent. The stock has dropped 12 per cent since it listed in November as part of the nation's biggest privatisation deal this century, dealing a blow to investors - mostly Japanese individuals - who flocked to the IPO.

Satoshi Yamada, a spokesman for Tokyo-based Japan Post Bank, declined to comment.

Since its listing, the postal bank has said that it will diversify its 205 trillion yen of investments away from JGBs to improve returns. It has been adding riskier assets including equities and foreign bonds to a so-called satellite portfolio that has risen to 56 trillion yen as at September.

Even after trimming its JGB holdings to a record-low 92.8 trillion yen, the assets still made up about 45 per cent of its portfolio in September. Unlike other private sector banks, Japan Post Bank's alternatives are limited because its ability to lend is restricted. And unlike the three megabanks - MUFG, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc - it gets all of its revenue from home.

While Japan Post Bank has steered some of the funds made available from shedding its JGB holdings into instruments such as foreign bonds, it has also put a portion at the central bank, earning 0.1 per cent interest. Deposits at the BOJ and other cash-equivalent assets have risen to about 19 per cent of the portfolio as at September. With the new easing, the company will have to pay the BOJ 0.1 per cent on additional reserves.

Japan Post Bank, the nation's biggest holder of customer deposits, may also face pressure to diversify investments because of an increase in the amount of cash that savers are allowed to leave at the company. In December, a government panel recommended that the deposit cap be raised to 13 million yen per account from the current 10 million yen.

"One option for Japan Post is to invest in foreign bonds and equities as funds in JGBs mature, and they're making progress in the strategy to diversify their satellite portfolio now," said SMBC Nikko's Mr Nakamura. "But they'll need to do this at a quicker pace." BLOOMBERG