Announcement: Moody's: Outlook for Japanese financial institutions is stable in 2018

Tokyo, December 13, 2017 -- Moody's Japan K.K. says the outlook for Japan's financial institutions, including banks, insurance companies and finance companies, is stable in 2018, reflecting the improved operating environment. The better operating environment is a result of stronger than potential domestic economic growth and broad-based global economic growth.

"On the other hand, ultralow interest rates in Japan will continue to pressure profitability and incentivize financial institutions to increase overseas investments, while geo-political risks and monetary tightening overseas could fuel financial market volatility, including in the foreign-exchange market," says Tetsuya Yamamoto, a Moody's Vice President and Senior Analyst.

"Moreover, rising protectionist sentiment overseas could lead to a greater need to hold liquidity and capital locally," says Yamamoto.

Moody's conclusions are contained in its just-released presentation, "Financial Institutions --Japan 2018 Outlook" which looks at the banks, life insurers, property and casualty (P&C) insurers and finance companies.

More broadly, for financial institutions, the importance of new technology to improve productivity and provide new products and services is increasing against the backdrop of an aging and shrinking population.

The stable outlook for the banks is based on Moody's view that stronger domestic and overseas growth will support asset quality, while profitability will deteriorate, but at a slower pace. In addition, yen liquidity will remain a credit strength.

The megabanks have faced tighter foreign currency funding, but a slowdown in overseas loan growth will ease the challenge.

The impact of ultralow interest rates on the life insurance companies is mitigated by high mortality and morbidity margins, but companies in the sector are also changing their liability structures to become more immune to the effects of low rates.

However, asset-liability management will remain challenging, although duration gaps are unlikely to widen significantly over the next 12-18 months.

For the P&C companies, domestic profitability will remain strong, driven by the auto insurance business, although further improvement is unlikely.

Regulatory and economic capitalization will continue to be robust, supported by strong domestic profits. Significant catastrophe risks exist, but the financial impact will be mitigated by enhanced risk controls and the use of reinsurance.

For the finance companies, profitability and asset quality will be stable, with capital buffers sufficient, while business and geographic diversification will provide stability to earnings. Strong relationships with Japanese financial institutions will support funding stability for the sector.