(Bloomberg) — The Norinchukin Bank is considering investing in a variety of assets to prepare for huge losses from selling about 10 trillion yen ($63 billion) of U.S. and European government bonds.
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Japan’s largest agricultural bank plans to gradually dispose of foreign bonds during the fiscal year ending March, a company spokesman said in an email. The bank now expects a full-year net loss of 1.5 trillion yen, triple its previous forecast of 500 billion yen.
Collateralized loan obligations are one of the investment options, the spokesman said on Wednesday. The bank will also consider investing in domestic and international bonds, equity and project finance. Unrealized losses are reflected in capital ratios and do not affect the bank’s strength, the spokesman added.
Norinchukin Bank, with an investment portfolio worth $357 billion, is one of Japan’s biggest investors in international financial markets. Trading desks from London to New York were abuzz on Tuesday with speculation about where the bank might move its holdings, with several market participants pointing to CLOs as likely candidates along with other non-government bonds.
While Japanese regulators have not expressed concerns about the financial stability of Norinchukin or other large financial institutions, the disclosures raise questions about possible losses elsewhere in the country’s banking system.
“Reallocating assets is difficult given regulatory capital and profitability constraints and tough market conditions,” said Eiji Kubo, director at S&P Global Ratings in Tokyo. “If done poorly, they could end up getting hammered.”
CEO Kazuto Oku commented on the bond sale in an earlier interview with the Nikkei newspaper, saying the company will reduce interest rate risk and “diversify into assets that take on the credit risk of companies and individuals.”
Norinchukin Bank’s bond losses were ballooning after it misjudged how high interest rates would stay, as a surge in foreign-currency funding costs wiped out gains from bonds it bought when yields were lower.
The bank’s foreign-currency funding strategy has led to negative carry, meaning interest costs exceed interest income, said Puri de Silva, a senior analyst at Bloomberg Intelligence.
“We believe negative carry could account for a significant portion of our projected losses in fiscal 2024,” he said.
Norinchukin Bank has long been known as one of the biggest buyers of bonds in the $1.3 trillion CLO market and has previously said the losses were unrelated to its CLO holdings, which totaled 7.4 trillion yen as of March.
Norinchukin Bank announced last month that it would raise 1.2 trillion yen from the agricultural cooperative that owns the bank to replenish its capital.
This is not the first time the bank has had to raise funds from members after investment losses: In 2009, it suffered Asia’s largest realized and unrealized losses on asset-backed securities during the global financial crisis, forcing it to raise 1.9 trillion yen.
Japan’s Financial Services Agency, which regulates the bank, is not concerned about the bank’s health, an agency official said, adding that book losses are already reflected in the bank’s capital ratios.
“It’s not ideal to realize losses, but they may think there are better opportunities,” said Philip McNicholas, Asia sovereign strategist at Robeco Group Inc. in Singapore. “This highlights supervisory deficiencies that are likely to be corrected, but it’s not a systemic risk.”
–With assistance from Takashi Sano and Patrick Winters.
(Adds analyst comment in 6th paragraph)
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