Japan Post Bank maintains strong liquidity in 2023, but profits still weak: Moody’s

Diversifying its bond portfolio will improve profits but exposes it to more risk.

Japan Post Bank is expected to maintain strong liquidity, solid asset quality and capitalization in 2023, although profitability will remain weak, according to Moody’s Investors Service in its latest ratings report on the bank.

Profitability, whilst weak, will remain stable, helped by the bank's portfolio diversification strategy, the ratings agency said. It further noted that the bank’s liquidity and funding are strong, supported by its broad retail deposit base. 

Moody's also expects the strong relationship between the government and Japan Post Holdings (JPH), as well as between JPH and Japan Post Bank, to remain unchanged, although the bank is gradually diversifying away from low-risk Japanese government bonds (JGBs).

Japan Post Bank has recently been moving to investment-grade foreign and non-sovereign domestic bonds. Whilst this will help improve profitability, it also exposes it to credit risks, Moody’s said. 

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Furthermore, although 46% of the bank's investment assets were in low-risk JGBs and deposits at the Bank of Japan (BOJ) as of the same date, a gradual increase in domestic interest rates exposes the bank to potential asset revaluation risks. 

“As of the end of December 2022, 90% of the bank's total liabilities were deposits from post offices and bank branches across Japan. This strength is partially offset by the bank's foreign-currency funding, which is mainly via repos and swaps,” Moody’s said.

The bank also has a small share of strategic investments in private equities and real estate funds, the ratings agency noted. However, these only make up 4.4% of its total investment assets as of end-2022.

Moody's also expects the bank's capitalization to also remain solid, although the portfolio diversification will increase its risk-weighted assets. This will hurt its capitalization, according to Moody’s.