Moody's has put Norinchukin Bank, Japan's fifth largest bank, on a watchlist for possible downgrade of its credit rating, due to the bank's upcoming massive losses from selling foreign bonds.
The agricultural bank warned last month that it may suffer losses of 1.5 trillion yen ($13.7 billion) this fiscal year due to the sale of US and EU sovereign bonds, which was devalued after interest rate increases.
Any downgrade by Moody's could put pressure on Norinchukin Bank's borrowing costs, which have exceeded the return on most of its foreign bond investment portfolios. A few days ago, S&P Global Ratings lowered its debt rating outlook to negative, citing earnings risk.
Moody's analysts said in a statement, "Higher long-term interest rates will continue to hurt the bank's profitability, as the overseas funding cost of most foreign bonds is higher than the investment return rate."
As part of the review, Moody's will evaluate Norinchukin Bank's ability to raise new capital from its member cooperatives, as well as its investment and financing strategies. The bank had previously said it plans to raise 1.2 trillion yen from its member cooperatives to increase capital.
Bloomberg intelligence credit analyst Pri de Silva wrote last week, "Potential downgrades increase collateral demand and wholesale financing costs. We believe that without significant capital injection, Norinchukin Bank will not be able to reverse its negative interest rate trend in the short term."
Moody's has assigned a long-term credit rating of A1 to Norinchukin Bank, the fifth highest investment grade rating. Reviews for rating downgrades usually take one to three months, and more than half of the cases result in downgrades.
Finally, the rating agency added that it expects deposits from its member cooperatives to remain "stable and sticky," reflecting the bank's role as the central financial institution for Japan's agriculture sector.