Bad bond bets forces Norinchukin to change strategy

Norinchukin Bank CEO Kazuto Oku — Bloomberg

Tokyo: Japan’s premier agricultural bank, Norinchukin, plans a complete overhaul of its investment strategy after massive losses on its overseas portfolio.

Unlike Mitsubishi UFJ Financial Group Inc and other big regular banks, Norinchukin relies primarily on its securities portfolio worth about 60 trillion yen to generate profit.

Its lending business is far smaller than rivals and it doesn’t have investment banking operations.

The pressure to make money however, is no less urgent than for the listed peers, since it has to keep generating returns for the farming cooperatives which own it.

That meant going overseas to escape Japan’s environment of negative interest rates.

The firm poured funds into US Treasuries, only to be saddled with losses when the US Federal Reserve’s tightening triggered higher foreign currency funding costs. Norinchukin had not counted on US interest rates remaining elevated for this long.

“We will review the entire portfolio strategy,” chief financial officer Taro Kitabayashi said on Wednesday.

Given its ownership structure, there are limits on the bank’s investment options. In addition to bonds, it is a major investor in collateralised loan obligations with 7.4 trillion yen worth of the securities as of the end of March.

“Norinchukin is a deposit-taking financial institution, so it is not appropriate for it to take large-scale equity investments,” said Hironari Nozaki, a professor at Toyo University.

Still, in the wake of its expected 500 billion yen loss this financial year, the bank has to reconsider its dependence on its securities portfolio, chief executive officer Kazuto Oku said.

It will try to generate revenue from increasing project financing overseas as well as getting more fees from asset management

Norinchukin had to take interest rate risks like buying US Treasuries since investment in equity would be too costly for its regulatory capital, according to an official at the Financial Services Agency, who asked not to be named discussing a specific bank.

Regulators have long been prodding Norinchukin to diversify its portfolio and the bank responded by starting to invest in other assets such as private equity, he said.

With the end of negative rates in Japan and the prospect of the Bank of Japan cutting back on bond-buying, yields on Japan’s sovereign bonds have begun to rise.

The yield on the benchmark 10-year Japanese government bonds (JGB) has reached 1% and yields on 20-year and 30-year debt have recently climbed to the highest in decades. That has made investing in JGBs an option again, Kitabayashi said.

To deal with the losses, the bank is turning to its members to raise 1.2 trillion yen of capital. — Bloomberg

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