(Bloomberg) -- Norinchukin Bank posted a ¥413 billion ($2.75 billion) loss in the fiscal first quarter as the Japanese agricultural lender offloaded bonds that had turned unprofitable.
The loss in the three months ended June 30 compared with net income of ¥63.9 billion a year earlier, the unlisted company said Thursday. It said in June it expects to report a net loss of about ¥1.5 trillion for the year ending in March.
Norinchukin is unwinding about $67 billion of US and European government bonds this fiscal year after making bad bets on interest rates. The notes began losing money after rate hikes by the US Federal Reserve and other central banks boosted funding costs, leaving Norinchukin needing to raise capital and sell assets to rebalance its $361 billion investment portfolio.
The bank’s foreign-exchange funding strategy saddled it with a negative carry, meaning its interest expenses were higher than its returns on bonds. The bank will potentially benefit after the Bank of Japan raised rates yesterday and the Fed signaled that it may cut rates later this year.
“The negative carry in Nochu’s investment portfolio is starting to improve now as it deleverages and restructures its investment portfolio,” said Pri de Silva, a senior analyst at Bloomberg Intelligence. “This could get another boost — on the funding cost side — from monetary policy actions on both side of the Pacific.”
Norinchukin plans to raise about ¥1.3 trillion in fresh capital from member cooperatives as a result of its losses, compared with an original plan of ¥1.2 trillion.
The bank will redeem about ¥700 billion worth of perpetual subordinated loans and then issue ¥736 billion in stock with lower dividends on Sept. 30. Additionally, it plans to issue ¥600 billion in fixed-term subordinate loans to its members during the year ending March 31.
Bloomberg Intelligence: Nochu May Need to Deleverage Its Balance Sheet to Reverse Losses
Norinchukin said the capital raise is estimated to boost its common equity tier 1 ratio by about 2.7% and total capital ratio by 2.3%.
“This should provide the rating agencies with some comfort, although some of this capital is meant to be used up through investments in asset classes which have higher capital charges than bonds,” said Pramod Shenoi, head of APAC research at CreditSights. The recent strengthening of the yen in the past few days could also work in the firm’s favor, and help reduce its losses — if the currency gains hold, he said.
The bank booked ¥168.7 billion in losses on sales of securities on a non-consolidated basis, versus gains of ¥142.2 billion a year earlier.
Its bond holdings stood at ¥29.8 trillion as of June, down from ¥31.3 trillion three months earlier. The bank plans to sell about ¥10 trillion worth of foreign sovereign bonds this fiscal year as it tries to revamp its portfolio.
Unrealized losses on its bond holdings came to ¥2.3 trillion as of June, up from ¥2.2 trillion three months earlier.
Norinchukin held ¥7.3 trillion of collateralized loan obligations as of June, a decrease from ¥7.4 trillion in March. The bank is one of the world’s biggest investors in the bundled corporate loans known as CLOs.
--With assistance from Serena Ng and Nao Sano.
(Updates with additional analyst comment in ninth paragraph)
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