It is not easy running a global bank based in a country with low forever interest rates, moribund domestic demand and anorexic margins. Japanese GSIB’s have spent the last 10 years pivoting overseas in search of yield and business growth. The building blocks have been solid - strong Japanese MNC relationships, deep pools of low cost JPY deposits available for deployment and active support from Japan inc.
But 2018 was a torrid year for Japanese GSIB’s. Japanese GSIB FY18 results presentations took place in May 2019, following the Japanese fiscal year end in March. They are not happy reading. Key financial ratios for returns (ROE), Capital adequacy (CET1), leverage (SLR) and efficiency (CIR) compare poorly with peer GSIB’s. So what happened.. ?
see 2018 GSIB Key Ratio’s Analysis - Japanese focus
MHFG results provide the starkest insights :
1) USD bond investments have been funded by shorter dated swaps, deposits and borrowings. The cost of funding has risen above the bond yields creating “negative carry.” The bank has cut the “negative carry” on its foreign bonds and rebuilt the portfolio to enable stable earnings - ¥150bn charge.
2) As domestic margins become suffocatingly thin the drive to take cost out of the business through technology becomes critical. There have been longstanding troubles with bank software that contributed to ¥500bn impairment losses on fixed assets.
3) Onerous capital treatment for cross shareholdings under new regulation has revealed CAR levels that are relatively low versus global peers.
The hope was that overseas would provide the cloud cover for domestic restructuring.. Not in 2018.