Norinchukin Bank Ramps Up Leveraged Loan Investments Amid Wider Losses

Norinchukin Bank has expanded its investments in higher-risk leveraged loans and sought additional capital after suffering significant losses from its exposure to low-yielding foreign bonds.

Riskier Investments and Capital Boost

The bank's holdings of collateralized loan obligations (CLOs) increased by over 25% in the previous quarter to ¥8.2 trillion ($54 billion), accounting for 18% of its portfolio. This growth is attributed to the weaker yen and new investments.

To offset losses, Norinchukin is seeking a capital increase of ¥41.1 billion from its members on March 31st. It will also raise its total debt issuance to members. The bank aims to enhance its portfolio and establish a solid profit base with the capital infusion.

Fallout from Interest Rate Surge

Norinchukin has been heavily impacted by rising US interest rates, which have eroded the value of its foreign bond holdings. The bank's estimated losses for the nine months ending March were close to the projected annual loss of ¥1.5 trillion.

Paper losses on bond holdings totaled ¥1.57 trillion, up from ¥1.5 trillion three months earlier.

Portfolio Overhaul and Market Impact

Norinchukin plans to divest over ¥10 trillion of US and European sovereign bonds this fiscal year. It has already disposed of ¥12.8 trillion worth of these bonds.

The bank's overhaul of its securities holdings has industry implications, as investors monitor its investment allocation after selling foreign bonds. Unlike other large banks, Norinchukin's lending business is limited, with investments forming the bulk of its assets.

Calls for Diversification and Transparency

A government panel recently urged Norinchukin to diversify its bond-heavy portfolio and hire external talent. The bank has disproportionate market exposure, with securities investment accounting for 80% of its revenue compared to 20% for Japan's top banks.

The panel raised concerns about the bank's lack of clear decision-making rules regarding portfolio valuation losses, which may have contributed to delayed bond disposals.

CEO Kazuto Oku will field questions on the full-year results in late May, as the bank does not hold a management briefing for its third-quarter results.