Japan’s Chugoku Bank sees improving profitability: Moody's

Rapid loan growth and US tariffs may lead to loan quality deteriorating, it warned.

Japan’s Chugoku Bank should be able to maintain its strong liquidity, moderate asset quality and capitalisation over the next 12-18 months, according to Moody’s Ratings.

The group's profitability, though still weak, is gradually improving, the ratings agency said.

“An expansion in net interest income, supported by increased domestic rates, will outweigh a rise in operating expenses due to inflation and pay rises,” Moody’s said.

However, it did warn against the bank’s rapid loan growth, which was 12.3% at FY2023 (ending March 2024) compared to an average of 6.8% in the three years prior.

“The rapid loan growth has added unseasoned loans and could lead to a deterioration in its loan quality,” Moody’s warned.

The sweeping tariffs imposed by the US could also put some pressure on the borrowers' credit quality.

Its adequate underwriting and monitoring policies and high loan loss coverage will help limit the potential negative impact, the ratings agency said.

Chugoku Bank’s liquidity is strong, supported by its solid deposit franchise in the home market of Okayama Prefecture.

“Although its parent holding company Chugin Financial Group, Inc.'s (Chugin FG) loan to deposit ratio deteriorated to 78% as of September 2024 from 71% a year earlier driven by loan growth, the ratio was still lower than the average of its rated peers,” Moody’s said.

“We expect its loan growth to moderate and the group to continue to maintain ample liquid resources,” it added.