(Bloomberg) -- Norinchukin Bank will give a first glimpse into how it is unwinding $65 billion worth of unprofitable sovereign debt holdings when it announces its quarterly results on Thursday.
The unlisted Japanese agricultural bank will disclose its fiscal first quarter earnings, after it shocked the market with massive projected losses from bad bets on interest rates. Market attention is likely to focus on the latest makeup of its investment portfolio, which stood at about $365 billion in March.
The bank will also provide an update on capital raising as well as the tally of unrealized losses on bond and other securities holdings. The paper losses ballooned to ¥1.8 trillion ($12 billion) as of March after the US Federal Reserve started aggressive interest-rate hikes in 2022.
Still, the results are unlikely to show drastic changes in its investment portfolio, since the bank has said it will gradually sell down the bonds through the current fiscal year ending in March. And there are no plans for a press briefing by company officials including Chief Executive Officer Kazuto Oku.
“It is a large holding to dispose of, even over a long period of time,” said Pramod Shenoi, head of Asia-Pacific research at CreditSights Inc. in Singapore. “There is uncertainty about whether their estimates of realized losses will be met.”
In June, Norinchukin said its annual loss is likely to be about ¥1.5 trillion, triple the amount it had forecast just a month earlier. It plans to sell about ¥10 trillion worth of US and European sovereign bonds this fiscal year as it tries to revamp its securities portfolio.
The bonds have become unprofitable after a surge in funding costs following sharp rate hikes by the Fed and other central banks.
“Norinchukin’s pace of divestment, if any, could be driven by its foreign-currency funding,” said Bloomberg Intelligence credit analyst Pri de Silva. “The lender should be able to orchestrate a deleveraging, if it chooses to go down that path, due to the depth of the sovereign and quasi-sovereign markets.”
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Any losses on the bond sales won’t affect the bank’s regulatory capital because it already reflects the paper losses.
Even so, Norinchukin is in talks to raise ¥1.2 trillion in capital from member cooperatives. De Silva said this is presumably to allow the bank to add riskier, high-yielding assets to its investment portfolio.
A Norinchukin spokesman said capital talks are progressing smoothly and the bank will report the situation at the time of the earnings announcement.
“The member cooperatives would clearly be unhappy about having to pump more money into Norinchukin, so the capital raise will not be easy,” said Shenoi at CreditSights. “The cooperatives will likely be eventually persuaded by the authorities to make the investment.”
Norinchukin hasn’t said exactly how it plans to alter its asset allocation, though it signaled collateralized loan obligations are an option. The bank is one of the world’s biggest investors in CLOs, and held ¥7.4 trillion of the assets in March.
The outlook for the bank is also clouded by potential credit rating cuts, which Shenoi said would increase funding costs, further denting profitability.
Moody’s Ratings recently put Norinchukin on review for downgrade, citing the impending losses to be realized. It will assess the bank’s ability to raise new equity capital, along with factors including its investment and funding strategy. S&P Ratings cut its outlook on Norinchukin’s debt to negative in June.
“The rating agencies may not be patient,” Shenoi said.
--With assistance from Serena Ng.
(Updates with comments from analyst in fifth, 11th and last paragraphs)
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