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Japan's Norinchukin Bank to sell $63bn of U.S. and European bondsBank's fiscal 2024 loss expected to reach record-high $9.5bn
Norinchukin Bank CEO Kazuto Oku said the bank "acknowledged the need to drastically change its portfolio management." (Nikkei montage/Source photos by Akitoshi Sugiura and Keiichiro Sato)
HARUKI KITAGAWA, Nikkei staff writerJune 18, 2024 20:04 JST
TOKYO -- Norinchukin Bank will sell more than 10 trillion yen ($63 billion) of its holdings of U.S. and European government bonds during the year ending March 2025 as it aims to stem its losses from bets on low-yield foreign bonds, a main cause of its deteriorating balance sheet, and lower the risks associated with holding foreign government bonds.
The company's net loss for the year ending March 2025, which was previously forecast to top 500 billion yen, will rise to the 1.5 trillion yen level with the bond sales.
"We plan to sell low-yield [foreign] bonds in the amount of 10 trillion yen or more," Norinchukin Bank CEO Kazuto Oku told Nikkei.
The bank invests in securities out of funds deposited by agriculture, forestry, and fisheries concerns.
Oku said the bank "acknowledged the need to drastically change its portfolio management" to reduce unrealized losses on its bonds, which totaled roughly 2.2 trillion yen as of the end of March. Oku explained bank's intention to shift its investments, saying, "We will reduce [sovereign] interest rate risk and diversify into assets that take on corporate and individual credit risk."
As of the end of March, Norinchukin had approximately 23 trillion yen of foreign bonds, amounting to 42% of its total 56 trillion yen of assets under management.
According to the Bank of Japan, outstanding foreign bonds held by depositary financial institutions amounted to 117 trillion yen as of the end of March. Norinchukin is a major institutional investor in Japan, holding roughly as much as 20% of the total on its own. Interest rates in the U.S. and Europe have risen and bond prices are down. This reduced the value of high-priced (low-yielding) foreign bonds that Norinchukin purchased in the past, causing its paper losses to swell.
Because the bank believes interest rate cuts in the U.S. and Europe are likely to take longer than it previously expected, it will try to significantly cut its unrealized losses by selling foreign bonds in fiscal 2024. It plans to sell over 10 trillion yen in foreign bonds, in addition to its normal trading activities.
The company is now considering investment alternatives, including equities, corporate bonds, corporate loans and private equity, as well as securitized products such as corporate loan-backed securities and mortgage-backed securities. By diversifying its portfolio, it aims to prevent unrealized losses from expanding to the point where they become a concern for management. It will also try to replace some low-yielding foreign government debt with other such bonds offering higher interest rates.
According to the U.S. Treasury Department, Japanese investors held $1.18 trillion of U.S. government bonds as of March, the largest slice among foreign holders. Massive sales by Norinchukin could have a sizable effect on the U.S. bond market.
The Japanese bank's financial results for the period ending March 2025 will deteriorate significantly as a result of the huge divestment of foreign bonds and turn paper losses into real ones. As of May, Norinchukin put its final loss at more than 500 billion yen, but this is now expected to reach the 1.5 trillion yen level.
In the year ending March 2009, in the aftermath of the collapse of U.S. investment bank Lehman Brothers, Norinchukin posted a final loss of about 570 billion yen due to impairment of securitized products. The forecast loss for this fiscal year is expected to top the previous record by roughly 1 trillion yen. Nevertheless, Oku said that putting the losses on the books in the year ending next March will "improve [the bank's] finances and portfolio, thus enabling to move into the black in the period ending March 2026."
Norinchukin Bank is considering raising 1.2 trillion yen to shore up its finances. It has already started discussions with Japan Agriculture Cooperatives, one of its main investors, and others.
Its unrealized losses have already been reflected in the company's equity ratio, and realizing those losses will not cause any change in the ratio. The bank said it will continue raising capital even if losses grow. It plans to hold aannual general meeting of representatives, analogous to an annual shareholders meeting, on Friday to seek the understanding of investors over the large losses expected this fiscal year and its policy of raising more cash. |
