Japan’s Chugoku Bank maintains strong liquidity despite weak loans

Higher interest rates will help improve profitability, Moody’s said.

Japan’s Chugoku Bank is expected to maintain strong liquidity and moderate capitalisation through 2025, according to the latest ratings commentary by Moody’s Ratings.

The bank’s strong liquidity is supported by its solid deposit franchise in its home market of Okayama Prefecture, as well as its parent holding company Chugin Financial Group’s low loan to deposit ratio (71%).

Chugoku Bank also reported a 12.3% loan growth for the fiscal year that ended in March 2024, which Moody’s said was thanks to an increase in structured finance transactions. However, this has resulted in a rise in “unseasoned” risks.

The bank’s loan problem ratio worsened to 1.9% as of September 2023, from 1.5% in March 2020. This indicates that borrowers are more susceptible to economic stress, Moody’s said.

“Rising domestic interest rates, inflation and pay rises will weaken borrowers' debt payment capabilities, especially small and medium-sized enterprises, and could result in a further deterioration in loan quality,” the ratings agency warned.

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The bank’s relatively high loan loss coverage will help cushion against unexpected asset quality deterioration, it added.

Meanwhile, it’s currently still-weak profitability will improve, albeit slowly, amidst higher interest rates in Japan.

However, the rising domestic interest rates will increase unrealized losses on the group's domestic bond portfolio. 

“The group's proactive efforts to reduce the interest rate sensitivity of its bond holdings by decreasing domestic bonds and shortening the bond duration will also help limit the impact as domestic rates rise,” Moody’s said.