Moody's: Japan Post Bank's portfolio diversification increases risks

Moody's Japan K.K. says that Japan Post Bank Co., Ltd.'s (JPB, unrated) liquidity levels and funding profile will stay strong, even as its credit, execution, operational and foreign-currency liquidity risks rise, due to its three-year plan to diversify its assets away from Japanese government bonds (JGBs) towards higher yielding, but riskier investment securities, such as foreign bonds and equities.

Moody's analysis is contained in its just-released report titled "Japan Post Bank: Planned Portfolio Diversification Will Increase Risk."

Moody's report says that JPB is transforming its balance sheet -- the largest among Japanese deposit-taking institutions -- in pursuit of profitability, partially in preparation for its initial public offering scheduled for later in 2015.

The report explains that JPB's liquidity and funding profiles will remain strong, because the bulk of its portfolio will remain invested in liquid and easy-to-monetize JGBs.

As for its liquidity position in particular, Moody's report says that JPB's liquidity profile will stay strong, because retail deposits remain the bank's predominant source of funds.

Moody's report also points out that while JPB's diversification plan will result in lower interest-rate risk, such risk will remain significant.

Over the long term, Moody's says JPB's credit profile will gradually start to resemble those of Norinchukin Bank (Norinchukin, A1/A1 stable, baa1) and Shinkin Central Bank (SCB, A1 stable, baa1); two Japanese banks that also invest mostly in securities rather than extending loans to borrowers.

Such an investment strategy tends to result in higher stated capital adequacy ratios, because many of the investment securities held are associated with low risk weights, including zero risk weights for JGBs.

In addition, these banks' regulatory and economic capital are highly sensitive to changes in Japanese and global financial markets. As a result, Moody's believes that the appropriate capital ratios for these banks with large investment portfolios are higher than for similarly rated banks with large diversified loan portfolios.

Subscribers can access the report here.