9/7/2017/Fitch Ratings
Japan’s three mega banking groups – SMFG, MHFG and MUFG – could issue as much as USD50 billion in securities eligible for total-loss absorbing capacity (TLAC) standards by fiscal year end-March 2019 (FYE19), according to Fitch Ratings’ latest estimates. This will allow the banks to meet TLAC requirements, build a safety margin and refinance expiring legacy instruments.
The banks are already well-positioned to meet risk-weighted asset (RWA) and leverage requirements, and we expect the market to absorb this estimated issuance – given that the holding companies of the mega bank groups issued USD33 billion in TLAC eligible senior unsecured bonds over the 12 months to end-March 2017.
Only MUFG was below the 2019 and 2022 RWA thresholds at FYE17, while MHFG is short of the currently known thresholds for leverage. The total shortfall of MUFG and MHFG is therefore USD13.2 billion based on 2019 thresholds and USD30.4 billion on 2022 thresholds. SMFG has already met the requirements.
There are several potential factors that could add to the TLAC challenge faced by the mega banks, most significantly the Basel Committee’s proposal to introduce a capital floor. The details are still to be agreed by the Committee, but banks’ estimate that their RWAs could increase by around 25%.
In terms of other challenges, profitability and internal capital generation could be undermined by a deterioration in the operating environment, either at home or overseas. In addition, a lack of investor demand for loss-absorbing securities – while not part of our central scenario – could make compliance more difficult. Stronger balance-sheet growth than we currently expect or significant M&A activity could add to capital requirements. Volatility of the yen could also affect capitalisation and RWA.
Japan’s mega banks are the only global systemically important banks (G-SIBs) in Asia-Pacific to which the Financial Stability Board’s (FSB) total loss-absorbing capacity (TLAC) requirements will start to apply from 2019. China’s four G-SIBs have until end-2024.
For detailed analysis and quantifications, see “Japanese ‘Mega’ Banks Could Issue USD50 billion in TLAC by 2019”, available at wwww.fitchratings.com or by clicking the link.
