Are Japanese banks flirting with danger in hunt for profit abroad?

Foreign securities account for up to 47% of total securities suggesting a larger risk appetite.

Japanese megabanks are expected to continue investing into foreign securities and expand into overseas markets in 2019 in a development signalling a higher risk appetite brought about by weak domestic environment.

Foreign securities account for 40-47% of the banks’ total securities, according to Fitch Ratings. Although this does not necessarily suggest a significant increase in risk appetite, banks provide limited details or credit quality information on their foreign investment holdings as they break them down only by government bonds and structured securities, analyst Kaori Nishizawa noted in a report.

Banks have also been actively expanding in Asian emerging markets to offset weak loan demand in Japan although the diversification into these markets, which have lower-eated operating environments than the country, implies heightened credit risks.

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In 2013, MUFG took over Bank of Ayudhya in Thailand, bought 20% of the Philippines' Security Bank in 2016 and doubled its stake in Indonesia's Bank Danamon to 40% in 2018. Meanwhile, SMFG owns Bank Tabungan Pensiunan Nasional in Indonesia, and Mizuho has tied up with the Export-Import Bank of Thailand.

“The banks continue to look for growth in developed markets, but their competitive position is also weaker than in Japan, which is likely to push the banks to take additional credit risk should they prioritise asset growth,” he added.

An earlier reading from a central bank index that measures the risk-taking practices in the country's financial services sector notes that such activities by Japanese banks have hit a near 30-year high in April-September 2018

“These approaches for overcoming challenges to profitability are increasing their vulnerability to credit and market risk,” concluded Nishizawa.