Ren Tao is a distinguished researcher at the Shanghai Finance and Development Laboratory
Compared with most banks, Norinchukin Bank, which has relatively abundant and stable liabilities, is more like an investment institution, and its huge floating losses on the investment side are not only related to its investment decision-making mistakes, but also closely related to its asset-liability structure. Given its size of around $700 billion, stable liabilities, and high core capital, Norinchukin Bank should weather the crisis this time, but it still needs reputational support from the Japanese government.
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This article focuses on Norinchukin Bank, Japan's fifth-largest bank, which has been attracting attention recently.
1. Introduction: Japan's fifth-largest bank announces huge investment losses (close to $10 billion)
(1) On June 18, 2024, Japan's fifth-largest bank, Norinchukin Bank (Agriculture and Forestry Central Treasury), said that it would sell 10 trillion yen (about 63 billion U.S. dollars) of low-yield US dollar and euro bonds in the year ending March 2025 to shift to other domestic assets such as higher-yielding mortgage bonds, mainly because its low-yield bond holdings are facing huge losses amid a sharply rising cost of funds. This has sparked renewed fears that the SVB crisis could return.
(2) Then, on June 20, the CEO of Norinchukin Bank (i.e., Kazuto Oku) said that the loss by March 2025 could widen from the previous 500 billion yen to 1.5 trillion yen (about 9.5 billion U.S. dollars). For this huge loss, Norinchukin Bank explained that it was mainly due to the wrong bet that interest rates in Europe and the United States would fall sharply.
To this end, Japanese Finance Minister Shunichi Suzuki said on June 21 that he would work closely with the Ministry of Agriculture to assess the impact of changes in market interest rates on Norinchukin Bank, which means that the Norinchukin Bank incident has not only received widespread attention from the market, but should also be concerned by the Japanese government and regulators at present.
(3) At the same time, Norinchukin Bank currently believes that interest rates in Europe and the United States will remain at a high level for a long time (even after interest rate cuts), which makes its investment strategy significantly different from before, that is, it is difficult to smooth out floating losses in the short term.
二、Norinchukin Bank（农林中央金库）
of floating losses
(1) The amount of floating losses far exceeds the historical level (including the period of the 08 financial crisis), and the latest data has exceeded 10 billion US dollars
In terms of data, Norinchukin Bank's floating losses since the current round of US dollar interest rate hikes are indeed amazing.
1. Horizontally, Norinchukin Bank's after-tax profit in fiscal year 2023 will be 52.260 billion yen, which is still positive, but other comprehensive losses will reach 1,531.7 billion yen, making its total comprehensive comprehensive loss reach 1,479.4 billion yen, which is close to the 1.5 trillion yen that the market is concerned about.
In terms of details, in fiscal year 2023, the floating loss from its investment and hedging tools will be 1,436.6 billion yen and 1,188.8 billion yen, respectively, totaling a staggering 2.63 trillion yen (about 11.514 billion US dollars).
2. From a longitudinal point of view, the other comprehensive loss of 1.53 trillion yen is at an all-time high, and it is also two consecutive negatives. Specifically, Norinchukin Bank's other comprehensive losses in 2022-2023 are 0.74 trillion yen and 1.53 trillion yen (total 2.27 trillion yen), respectively, resulting in a total comprehensive loss of 0.55 trillion yen and 1.48 trillion yen (total 2.03 trillion yen), respectively, which is far higher than the 0.57 trillion yen in 2009 (during the financial crisis), which means that Norinchukin is currently in the future The bank's floating loss is indeed quite alarming.
3. However, the above data is not the latest, according to the latest data, as of March 2024, Norinchukin Bank's unrealized floating loss has risen to 1,769.8 billion yen, that is, its floating loss situation is obviously deteriorating.
(2) The floating loss is mainly caused by bond investment: the floating loss caused by bond investment is as high as 2.2 trillion yen
According to data released by Norinchukin Bank, in the 2021-2023 fiscal year, the floating losses caused by its bond investments were 334.3 billion yen, 1,729.8 billion yen and 2,192.3 billion yen, respectively, while equity investments were 1,036.7 billion yen, 804.9 billion yen and 586.9 billion yen, respectively, during the same period. This means that bond investment is the source of Norinchukin Bank's floating losses.
3. Strange asset-liability structure:
Norinchukin Bank更像是一家投资机构
From the perspective of asset-liability structure, Norinchukin Bank has a very obvious difference from other banks, that is, it is more like an investment institution, and its dependence on market risk is much higher than credit risk.
(1) The proportion of securities investment is about two percent of loans (similar to Silicon Valley Bank)
The ratio of loans to Norinchukin Bank's total assets hovered around 20% overall, which is at a significantly low level, while the proportion of portfolio investment in its total assets hovered in the range of 60-70% at one time, and although it has fallen to the level of 40-50%, it is still at a high level. From this perspective, Norinchukin Bank and Silicon Valley Bank are somewhat similar.
(2) The loan-to-deposit ratio is only about 30%, and the funds on the liability side are relatively sufficient (similar to the Postal Savings Bank)
Compared with the relatively low proportion of loans, the proportion of deposits in the total assets of Norinchukin Bank is as high as 60-70%, which makes its deposit-loan ratio only about 30%, which means that Norinchukin Bank is a bit similar to the domestic Postal Savings Bank, that is, its debt side is more sufficient, but the credit is obviously insufficient, so that it has to increase the pursuit of investment assets.
(3) Credit risk is not a big problem, mainly due to market risk
Norinchukin Bank not only has a low loan ratio, but also has a low non-performing loan ratio overall, such as its non-performing loan ratio since 2019 which is less than 0.19%, 0.40%, 0.44%, 0.46% and 0.46%, respectively. This means that credit risk is not an issue for Norinchukin Bank, but market risk is more of a concern due to its relatively high proportion of securities investment.
(4) The income of interest rate spreads is unstable, the middle income value is low, and its profit is highly dependent on the investment side
Similar to most Japanese banks, Norinchukin Bank's spread income is not stable and highly disturbed in a low spread environment, while the absolute value of the middle income is relatively low, which makes Norinchukin Bank's income highly dependent on the investment side. Therefore, investment research capabilities and risk management capabilities are of paramount importance to Norinchukin Bank.
四、Norinchukin Bank的投资结构分析
(1) The current investment portfolio exceeds 56 trillion yen, and the amount of bond investment exceeds 31 trillion yen (1/3 to be sold)
According to the latest data, Norinchukin Bank's current portfolio size is 56.3 trillion yen, a net increase of 6 trillion yen from FY2022. Among them, the bond portfolio volume reached 31.30 trillion yen, a net increase of 4.7 trillion yen from the 2022 fiscal year, and the equity portfolio volume reached 1.3 trillion yen.
This means that the volume of 10 trillion yen bonds sold is equivalent to about one-third of the current holdings.
(2) The average coupon rate is 4.6%, and most of the bonds held are foreign currency bonds such as US dollars and euros (accounting for 3/4)
According to the latest data, the average interest rate of Norinchukin Bank's securities investment is 4.6%, an increase of 303BP and 230BP from 2021 and 2022, respectively.
1. The coupon rate of yen-denominated bonds reached 2.5%, an increase of 261BP and 65BP respectively from 2021 to 2022, which means that the yen bonds held by Norinchukin Bank are mainly credit bonds. Of this, the market portfolio denominated in yen accounted for 24% of the total, which has remained generally stable in recent years.
2. The average coupon rate of foreign currency-denominated bonds is 5.28%, an increase of 308BP and 283BP respectively from 2021 to 2022. 3 or so. In other words, Norinchukin Bank's 56.3 trillion yen portfolio consists of about 38 trillion yen in US dollars and eurobonds, which is a staggering amount.
(3) About 50% of the portfolio has a maturity of more than 5 years, and the bonds that have been added in recent years are mainly long-term
1. From the perspective of maturity distribution, Norinchukin Bank's portfolio accounts for 17% and 31% of the portfolio of more than 10 years and 5-10 years respectively, totaling 48%, close to 50%, that is, the duration seems to be generally long.
2. Further from a numerical point of view, the size of Norinchukin Bank's portfolio during the 2019-2022 period has generally declined, that is, from 62.10 trillion yen to 50.30 trillion yen, but the proportion of long-term bonds has climbed during this period, and the bonds that have increased their positions in the last year are mainly bonds with a maturity of more than 10 years and 1-5 years, which means that the market risk borne by Norinchukin Bank's portfolio has actually risen in recent years.
V. Conclusion
(1) In terms of volume, Norinchukin Bank ranks fifth in the Japanese banking industry at about 700 billion US dollars, far surpassing Silicon Valley Bank in the United States, so its floating loss on the market should not be comparable to Silicon Valley Bank.
(2) In recent years, Norinchukin Bank's huge floating losses due to its investment in European and American bonds are not only related to its misjudgment of the market, but also related to its asset-liability structure, that is, it is more like an investment institution than a bank, which makes Norinchukin Bank itself highly dependent on market risk, and credit risk and interest rate spreads have less impact on it.
(3) Slightly different from Silicon Valley Bank, Norinchukin Bank's liabilities are still relatively stable (about 87% from the Japanese Agricultural Organization, 3-5% from the Japan Forestry and Fisheries Organization, and about 9% from Japanese financial institutions and government funds, etc.), and the capital adequacy ratio is also at a high level (the core Tier 1 capital adequacy ratios from 2019 to 2023 are 19.49%, 19.86%, 17.87%, 17.82% and 16.43%, respectively). To a certain extent, this has provided some support for its passage through the crisis.
(4) However, this support still depends to some extent on the attitude of the Japanese government department. After all, it takes a lot of courage to sell about one-third of your portfolio, and it will release some of the risky assets while also writing off some of the Tier 1 capital. Simply calculated, Norinchukin Bank's core Tier 1 capital is currently 5.4 trillion yen, and if the floating loss of 1.5 trillion yen is fully included in the core Tier 1 capital, its core Tier 1 capital adequacy ratio will fall to about 11%. Overall, it is still a relatively good problem, but it will have an impact on market expectations and require the Japanese government to give the blessing of reputational risk.
Source: Sycamore Tree Think Tank