TOKYO – For years, it was best known as Japan’s collateralised loan obligations (CLO) whale – a US$357 billion (S$482 billion) investing giant with a seemingly insatiable appetite for yield in an era of rock-bottom interest rates.
Now, the century-old Norinchukin Bank has become one of the biggest casualties of an entirely different financial world, where higher-for-longer borrowing costs are exacting a painful toll on the market’s weakest hands.
The agricultural bank surprised the market this week by saying it would sell US$63 billion of low-yielding US and European government bonds that had become unprofitable to hold after the firm’s shorter-term funding costs jumped.
The unlisted firm warned that losses this fiscal year may swell to 1.5 trillion yen (S$12.8 billion) – triple an estimate made less than a month ago.
While Norinchukin and the Japanese government have expressed confidence in the bank’s ability to weather the losses, the episode is a reminder of the dangers still lurking in the financial system 15 months after the collapse of SVB Financial Group’s Silicon Valley Bank.
Signals from the US Federal Reserve and other central banks that they are in no rush to cut rates have caught out many investors betting on more aggressive moves.
That is creating a tricky landscape for institutions like Norinchukin, which piled into US and European sovereign bonds on the expectation that falling rates would spark a debt rally after two years of declines.
The bank is now overhauling its portfolio, selling off a third of its sovereign holdings and shifting to other types of assets, including CLOs, and domestic and overseas bonds.
“It is surprising that they didn’t hedge interest-rate risk,” said Mr Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore.
“It may have been that they had high conviction regarding Fed and ECB (European Central Bank) cuts and initially thought it was just a temporary delay.”
Norinchukin is not the only bank suffering from wrong-way bets on rates. SVB collapsed early in 2023 after its massive portfolio of long-dated bonds lost value as interest rates soared. The losses sparked a run on deposits that eventually spread to other regional lenders, including Signature Bank and First Republic Bank.
More recently, the higher-for-longer rates have led to paper losses at many banks and fund managers. The Fed has yet to move in 2024, even though the market was pricing in 150 basis points of cuts as recently as December.
US banks had US$516.5 billion of unrealised losses in their securities portfolios at the end of March, according to regulators.
Norinchukin has rattled markets before. In 2009, it was forced to raise 1.9 trillion yen after racking up Asia’s biggest losses on investments in asset-backed securities during the global financial crisis.
The bank serves as a central financial institution for Japan’s roughly 3,300 agricultural, forestry and fishery cooperatives.
It takes deposits from cooperatives, rather than directly from farmers, and manages the money through medium-to-long-term investments.
An official from Japan’s Ministry of Agriculture, Forestry and Fisheries said “we will continue to closely monitor the business conditions” of the bank, with the country’s Financial Services Agency.
Norinchukin’s unrealised losses have been reflected in its capital ratio and will not affect the lender’s soundness, a spokesperson for the company said on June 19.
BLOOMBERG
