Rising rates lift profitability of Japan’s 77 Bank

The same rising rates will increase the bank’s unrealized losses on its domestic bonds.

Japan’s 77 Bank is on the path to gradually improve its profitability amidst rising interest rates, but also faces increasing risks from unrealized losses on its domestic bonds.

Although still weak, the Miyagi-based bank’s profitability will improve whilst asset risk is expected to remain moderate, said Moody’s K.K. Japan,

“Its problem loan ratio has been stable at around 2% over the past five years, supported by solid loan quality and conservative risk management, whilst exposure to the real estate sector has increased,” the ratings agency noted in its latest ratings report on 77 Bank, where it reaffirmed the bank’s A3 long-term (LT) domestic and foreign currency deposit ratings.

The bank's loan loss coverage is also relatively high compared to other Japanese regional banks rated by Moody’s.

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Rising interest rates in Japan will drive profitability, given market rate linked loans as a percentage of its total loans is significantly lower than megabanks. 

However, the same rising rates will increase the bank’s unrealized losses on its domestic bonds.

Unrealized gains on equity and other securities, which were respectively 24.5% and 10.2% of its TCE as of December 2023, can help offset the negative impact, Moody’s said. 

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“The bank has somewhat reduced the interest rate sensitivity of its bond investments by reducing its domestic bond holdings since March 2022,” it added.

The bank's liquidity is “strong,” supported by its solid deposit franchise in the home market of Miyagi Prefecture and low loan to deposit ratio of 65% as of the end of December 2023, according to Moody’s.