JAPAN TIMES



 

 
Japan’s banks are grappling with a problem that was unthinkable a few years ago: Loans are growing faster than deposits.
 
The country is seeing an explosion of borrowing as businesses boost capital investment and buyout deals get bigger.
 
At the same time, deposits aren’t keeping up, creating a new challenge that could potentially restrain lending and prompt lenders to resort to other, more expensive funding means.
 
For decades, firms contended with the opposite case as deflation kept loan demand tepid and prompted savers to hoard cash that retained its value.
 
“We need to be more selective in our lending than before,” Sumitomo Mitsui Financial Group (SMFG) CEO Toru Nakashima told reporters at the bank’s earnings briefing on May 13.

“In the past, we were in a situation where deposits were relatively abundant, so whenever there was demand, we were able to extend loans quite aggressively.”
 
Outstanding loans for all Japanese banks increased by 5.4% year-on-year in April, according to the latest data from the Bank of Japan.

Excluding the period when businesses rushed to borrow during the pandemic, the percentage gain is the biggest since the central bank started compiling the data in 2001. Deposits grew only 1.9%.
 
A senior official at the Financial Services Agency (FSA) said he is watching the deposit trend very closely, adding that it had not been much concern for the regulator until recently.

Given liquidity and other regulatory requirements, the FSA is paying attention to whether banks can continue to meet growing finance needs of customers, said the official, who asked not to be identified in order to discuss the matter candidly.
 
Potential funding constraints have prompted big banks to team up with other firms, including a life insurer and other asset owners, while regional banks consolidate. A funding crunch could also provide opportunities for private credit funds to crack into a market long dominated by commercial banks.
 
Given the weak increase of deposits, SMFG will slow down the pace of its loan growth for the next three years. Japan’s second-largest bank plans to increase domestic deposits by ¥7 trillion ($44 billion) during the period while holding loan growth to ¥3 trillion, Nakashima said.
 
Thanks to the strong lending, Japan’s top banks are forecasting another year of record profits despite prolonged uncertainty over the Middle East.

The three biggest banks, which also include Mitsubishi UFJ Financial Group (MUFG) and Mizuho Financial Group, are not experiencing deposit flight or facing the near-term prospect of a funding shortage. Their deposits still considerably exceed their outstanding loans.
 
MUFG CEO Junichi Hanzawa said he does not have big concerns for yen funding given its “ample” deposits. “But for the future, we have to pay close attention to how we review our yen balance sheet structure,” given intensifying competition for deposits, he said.

“It’s our biggest responsibility to meet our clients’ needs. So, our main thinking is to address the needs with various funding measures.”
 
In April, Sumitomo Mitsui sold ¥150 billion of senior straight bonds, its first issuance of such yen notes in 12 years.

The move is part of the bank’s efforts to diversify funding sources as the gap between loans and deposits is narrowing, according to SMFG’s Nakashima. “We need to build a track record (of issuing) and investor pool, otherwise, we won’t be able to secure large amounts when we need,” he said.
 
The banks have already started looking for ways to reduce use of their own balance sheets by inviting institutional investors.
 
In April, it was reported that Sumitomo Mitsui and Nippon Life Insurance were in talks to set up a private credit fund with initial capital of at least ¥500 billion, to provide loans for leveraged buyouts and other areas such as real estate transactions and mezzanine financing, citing people familiar with the matter.
 
Mizuho CEO Masahiro Kihara said the bank will meet its clients’ financing needs no matter what.
 
“But it’s important to carefully assess whether we use our own balance sheet or use an asset-turnover model,” he said, referring to the business in which the bank underwrites debt and sells it to institutional investors.