BOJ Warns Banks May Take Excessive Risks to Stay Profitable (2)

(Bloomberg) -- The Bank of Japan expressed concern that some banks may take excessive risks to maintain profitability while the ability of others to lend could weaken following the introduction of its negative interest-rate policy.

Banks are less able to make up for declining profitability of domestic lending because the areas that had supported earnings, such as low bad-loan costs, increased fees and commissions, and overseas loans, are all showing signs of fading, the central bank said Monday in its semi-annual financial system report.

“It is necessary to examine both the risk of overheating -- excessive accumulation of macro risks and exuberant asset prices -- and the risk of a gradual pullback in financial intermediation due to a persistent decline in profits,” the central bank said.

Bank shares are the worst performers in Japan this year after the central bank started charging them for some of their deposits as part of its efforts to vanquish decades of deflation. SMBC Nikko Securities Inc. analyst Masahiko Sato estimates that profit at the average regional lender could plunge 90 percent to zero by March 2023 if the policy continues.

“Monetary policy is putting regional bank earnings under intense pressure,” Sato wrote in a report Monday. “The policy is meant to boost the Japanese economy, but does so at the expense of financial institutions.”

Absorbing Losses

The BOJ modified its monetary easing program in September to control bond yields in a move that analysts say was prompted by concerns over financial institutions’ profitability.

For a QuickTake Q&A on the BOJ’s yield-curve control policy, click here.

“If the recent trend of declining profits persists, the number of financial institutions experiencing an erosion of their loss-absorbing capacity could increase,” the central bank said. The number of banks, particularly regional lenders, that are unable to cover their expenses with interest income and revenue from fees and commissions has been increasing, it said.

Real Estate

At the same time, some banks may shift toward “excessive risk taking” to maintain profitability as earnings from loans and securities investment decline due to low and negative rates, the central bank said.

One area requiring close attention is lending to the real estate sector, which has outpaced credit growth in other industries, according to the BOJ. Commercial land prices in Japan’s three biggest cities rose for a fourth year, a land ministry report showed last month.

“Although the real estate market currently does not appear to show signs of overheating on the whole, it has been observed that some transactions in metropolitan areas took place at lofty prices and came with low investment yields,” the central bank said.

The BOJ kept its assessment that Japan’s financial system “has been maintaining stability.”

(Updates with analyst predictions in fourth and fifth paragraphs.)

To contact the reporters on this story: Gareth Allan in Tokyo at gallan11@bloomberg.net, Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward, Paul Panckhurst

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