Norinchukin Bank, a significant Japanese lender, has faced substantial challenges due to the upward trend in global interest rates. This has led to an expected annual loss that is likely to surpass the previous projection of ¥1.5 trillion. The bank is now accelerating the disposal of unprofitable foreign bonds to mitigate these losses.

Japanese Lender Battles Rising Rates and Asset Disposal

Impact of Rising Interest Rates on Norinchukin Bank

Norinchukin Bank got stung by the rising global interest rates. As a result, its foreign-currency funding costs surged beyond what it earned from the securities. This led to significant losses on its overseas bond holdings. In September, the bank's bond holdings stood at ¥26.9 trillion, down from ¥29.8 trillion three months earlier. Unrealized losses on bonds were ¥1.51 trillion in September, dropping from ¥2.3 trillion three months earlier.The aggressive rate hikes by the Fed in 2022 played a crucial role in this situation. The bank's lending business is relatively small compared to other large banks, and its investment portfolio makes up a large portion of its assets. This makes it more vulnerable to changes in interest rates.

Disposal of Unprofitable Foreign Bonds

In June, Norinchukin Bank shocked global markets by disclosing plans to sell about ¥10 trillion of US and European sovereign bonds this fiscal year. It aimed to stem losses from wrong-way bets on rates. Now, it plans to offload even more than that amount and has already disposed of ¥7.5 trillion in the first half. This accelerated asset disposal is a crucial step in improving the bank's portfolio.The disposal of these bonds is not an easy task. The bank needs to carefully consider where to allocate the investment money after dumping the foreign bonds. Traders and investors are closely watching how Norinchukin plans to reallocate its $304 billion investment portfolio.

CEO's Perspective and Future Outlook

CEO Kazuto Oku is preparing for growing uncertainty, including the possibility of higher US rates under a Donald Trump presidency. He didn't dismiss the potential for losses to reach about ¥2 trillion. In the second half, the bank will take deeper steps to improve its portfolio. There's a risk that Trump's policies will fuel inflation, prompting the US Federal Reserve to stop cutting rates.Oku said the bank has retained earnings of about ¥1.3 trillion that could absorb any wider losses in the second half. A return to profit next fiscal year is in sight. This shows the bank's confidence in its ability to recover from the current situation.

Investment Portfolio Reallocation

Chief Financial Officer Taro Kitabayashi said at the briefing that the bank will invest in bonds, stocks, and project finance, as well as securitized products such as collateralized loan obligations. The agricultural bank is a big investor in CLOs, which are packages of leveraged corporate loans. Its CLO holdings fell to ¥6.5 trillion as of September from ¥7.3 trillion in June, mainly due to redemptions.This reallocation of the investment portfolio is a crucial part of the bank's strategy to improve its financial position. It needs to find the right balance between different asset classes to maximize returns and minimize risks.Norinchukin isn't the only Japanese bank that suffered losses from foreign bond holdings during the Fed's hiking phase. However, the timing and scale of its losses stood out, prompting questions over what went wrong. In September, Japan's agriculture ministry convened a panel of outside experts to examine Norinchukin's investment and governance structure. The farm ministry has joint oversight over the bank with the Financial Services Agency. The revamping of Norinchukin's securities holdings is expected to have ramifications on various markets.