After selling unprofitable US and European bonds, Japan's fifth-largest bank, Norinchukin Bank, suffered a loss of 413 billion yen (approximately $2.75 billion) in the second quarter.
Norinchukin Bank stated on Thursday that it incurred a loss of 413 billion yen in the first fiscal quarter (the three months ending June 30), compared to a net income of 63.9 billion yen in the same period last year. The company had previously indicated in June that it expected a net loss of about 1.5 trillion yen for the fiscal year ending in March, nearly three times that of the 2008 financial crisis.
Due to misjudging the path of the Federal Reserve's interest rates, the bank suffered significant losses on its bond holdings and had to sell approximately $67 billion worth of US Treasury bonds and European government bonds in the current fiscal year.
The situation of Norinchukin Bank is no different from that of Silicon Valley Bank. The interest rate hike cycle by major central banks such as the Federal Reserve has led to increased financing costs, and these bonds began to incur losses. Norinchukin Bank had to raise funds and sell assets to rebalance its $361 billion investment portfolio.
As previously mentioned in Wall Street articles, Norinchukin Bank holds 20% of Japan's foreign bonds, and as it begins to massively sell US bonds, a chain reaction could quickly spread to "Mrs. Watanabes" (retail investors); and as Japan is the "largest creditor" of US bonds, whether local sellers' sales will trigger a "fire sale" of US bonds is a concern.
Due to a loss of 168.7 billion yen from securities sales, the unrealized loss on bonds has risen to 2.3 trillion yen.
Because of a mistake in its foreign exchange financing strategy, Norinchukin Bank now has a negative interest margin, making it difficult for bond returns to cover interest expenses. However, with the Bank of Japan raising interest rates on Wednesday and the Federal Reserve hinting at a possible rate cut in September, the bank may benefit from this.
Bloomberg Intelligence Senior Analyst Pri de Silva stated: "As Norinchukin Bank deleverages and restructures its investment portfolio, its negative interest margin on the portfolio is now beginning to improve. The monetary policies of the US and Japanese central banks may once again drive improvements in profitability in terms of financing costs."
At the same time, due to the losses, Norinchukin Bank plans to raise about 1.3 trillion yen in new capital from member cooperatives, up from the original plan of 1.2 trillion yen.
The bank will redeem permanent subordinated loans worth about 700 billion yen on September 30, then issue shares worth 736 billion yen with lower dividends. In addition, the bank also plans to issue 600 billion yen in term subordinated loans to its members in the new fiscal year ending March 31 next year.The Norinchukin Bank has stated that the capital increase is expected to raise its Common Equity Tier 1 (CET1) capital adequacy ratio by approximately 2.7% and its total capital adequacy ratio by 2.3%.
In response, Pramod Shenoi, Head of Research for Asia-Pacific at CreditSights, said: "This should provide some comfort to rating agencies, although part of the capital will be used for investments with higher capital requirements than bonds."
He noted that the recent strengthening of the Japanese yen could also be beneficial for Norinchukin Bank and help to reduce losses.
The announcement showed that Norinchukin Bank's unconsolidated securities sales resulted in a loss of 168.7 billion yen, compared to a profit of 142.2 billion yen in the same period last year.
As of June, Norinchukin Bank's bond holdings stood at 29.8 trillion yen, down from 31.3 trillion yen three months earlier. The bank plans to sell about 10 trillion yen worth of foreign sovereign bonds in the current fiscal year to offset significant unrealized losses.
Furthermore, as of June, the unrealized losses on its bond holdings had increased from 2.2 trillion yen three months prior to 2.3 trillion yen.
Norinchukin Bank is also one of the largest investors in collateralized loan obligations (CLOs) globally. As of June, the bank held 7.3 trillion yen in mortgage-backed securities, down from 7.4 trillion yen in March.