Japanese mega banks' overseas loans book to grow 10%-20% per annum

But Fitch warns it will be a 'selective' growth.

Fitch Ratings says that Japanese "mega" banking groups are likely to see more overseas expansion, both through organic growth and minor acquisitions, which would in turn lead to a modest increase in risk appetite. However, this alone should not constrain the banks' Viability Ratings as an increase in risk tolerance should be adequately absorbed by risk-adjusted loan pricing and strengthened capital buffers.

Fitch says it expects the banks' modest overseas loans books to grow 10%-20% per annum in FYE13 and FYE14 by deploying their abundant liquidity in yen. The mega banks are likely to look beyond their core customers of large corporate borrowers if they are to maintain such growth in the medium-term, in turn putting pressure on their asset quality.

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

At present, gross profit from overseas operations is still insufficient to significantly affect total earnings. Total net interest revenue and fee income at the mega banks fell 1.4% yoy on average, in H1FYE13, despite annual growth of 10% in overseas operations (FYE12: +6%). 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.

Fitch expects future acquisitions to be modest, in line with the banks' earnings ability. Mitsubishi UFG Financial Group (its subsidiary banks, Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi UFJ Trust and Banking Corporation rated at A-/Stable) has the greatest scope for overseas acquisitions given their stronger capital position. Its Fitch Core Capital ratio at H1FYE13 was 10.4%, compared with Sumitomo Mitsui Financial Group's (SMFG: A-/Stable) 9.2%, and Mizuho Financial Group's (Mizuho: A-/Stable) 7.6%.