Fitch predicts strong overseas expansion for Japanese megabanks

Growth up to 20% to come from M&As and organic growth.

Fitch Ratings said the expansion by Japan’s megabanks led by the Big Three, will lead to a modest increase in risk appetite.

It expects the modest overseas loans books of the megabanks to grow 10% to 20% per annum in fiscal years 2013 and 2014 by deploying their abundant liquidity in yen. Megabanks are likely to look beyond their core customers of large corporate borrowers to maintain growth in the medium-term, in turn putting pressure on their asset quality.

This is mitigated, however, by the banks' demonstrated ability to cover loan impairment losses by net interest revenue and by the gradual improvement of their core capitalization through internal capital generation, providing additional buffers against risk.

Fitch noted that gross profit from overseas operations were still insufficient to significantly affect total earnings. Total net interest revenue and fee income at the megabanks fell 1.4% year-on-year on average, in the first half of fiscal 2013 despite annual growth of 10% in overseas operations.

However, offshore contribution should help offset any fall in domestic earnings over time. Enhanced earnings and asset diversification through selective overseas expansion should also improve their financial profile.

Japan’s megabanks consist of Mitsubishi UFG Financial Group; Sumitomo Mitsui Financial Group and Mizuho Financial Group.