This report does not constitute a rating action.

Unrealized losses on foreign bonds at Norinchukin Bank stand out.

The bank expects to post a ¥1.5 trillion of loss in fiscal 2024 (ending March 31, 2025). It will also redeem early additional tier 1 capital as well as raising ¥700 billion of common equity and ¥500 billion of Tier 2 capital from member cooperatives. Disposals of bonds with negative spreads and valuation losses are behind Norinchukin Bank's woes, in our view.

Generally, rate cuts by central banks in industrialized countries during the COVID-19 pandemic, followed by sharp increases in inflation and interest rates, pushed down prices for foreign bonds. This led to unrealized losses at many financial institutions.

We have received inquiries from many investors concerning the characteristics that distinguish Norinchukin Bank from other financial institutions. Here, S&P Global Ratings presents frequently asked questions from investors about this. For comparison, we refer to Japanese major banks as well as Shinkin Central Bank and Japan Post Bank Co. Ltd., both of which are deposit-taking institutions and make investments mainly in securities.

Japanese bank ratings and assessments
					SACP subscore
	Issuer credit rating	Outlook	Stand-alone credit profile (SACP)	Anchor	Business position	Capital and earnings	Risk position	Funding & liquidity--Funding	Funding & liquidity--Liquidity
Norinchukin Bank	A	Negative	bbb+	bbb+	Moderate	Strong	Moderate	Strong	Strong
Shinkin Central Bank	A	Stable	bbb+	bbb+	Adequate	Strong	Moderate	Adequate	Strong
Japan Post Bank Co. Ltd.	A	Stable	bbb+	bbb+	Adequate	Adequate	Moderate	Strong	Strong
Mitsubishi UFJ Financial Group Inc.	A-	Stable	a	bbb+	Strong	Adequate	Adequate	Strong	Strong
Mizuho Financial Group Inc.	A-	Stable	a-	bbb+	Strong	Moderate	Adequate	Strong	Strong
Sumitomo Mitsui Financial Group Inc.	A-	Stable	a	bbb+	Strong	Adequate	Adequate	Strong	Strong

Frequently Asked Questions

What sort of a financial institution is Norinchukin Bank? 

Norinchukin Bank is a financial institution that serves as a central bank for member cooperatives, to which it provides credit services. It was established in 1923, funded jointly by agricultural, fishery, and forestry cooperatives in Japan, including Japan Agricultural Cooperatives (JA), Japan Fishery cooperatives (JF), and Japan forest Owners' Cooperatives (JForest). According to the Norinchukin Bank Act that governs the bank, its mission is to contribute to the development of the nation's economy by supporting the advancement of Japan's agriculture, fishery, and forestry industries by providing financial services to related cooperative systems. The Financial Services Agency and the Ministry of Agriculture, Forestry, and Fisheries are the two key supervisory agencies for the bank. Meanwhile, the minister of agriculture, forestry and fisheries and the prime minister are the state ministers in charge of the bank. The prime minister delegates his authority, granted by the Norinchukin Bank Act, to a commissioner at the Financial Services Agency. The bank is prudentially regulated on financial soundness; it is designated as a domestic systemically important bank.

The bank provides credit services for member cooperatives nationwide. It invests funds deposited by member cooperatives and is one of the world's largest institutional investors. Agricultural cooperatives and the credit federations of agricultural cooperatives are the main depositors at Norinchukin Bank. With deposits totaling ¥109 trillion and more than 500 member cooperatives nationwide, mainly in rural areas, the bank is a leader in Japan's financial sector. Meanwhile, agricultural cooperatives extend by themselves loans worth ¥24 trillion to their local clients. Norinchukin Bank invests the surplus cash of about ¥80 trillion deposited by member cooperatives.

Can you describe the bank's structural characteristics? 

Norinchukin Bank is owned by cooperative members, including agricultural cooperatives, which have equity in the bank. The bank does not prepare consolidated data for all its cooperative members. Even so, the performance of various cooperatives impacts the bank. Agricultural cooperative services are classified into three categories. The first is economic services including sales of agricultural products and group purchases of production materials. The second is mutual aid services that provide members with aid for losses from business or accidents. The third is credit services such as deposit-taking, loans, and making investments. It is common for agricultural cooperatives to see losses from economic services. They are therefore highly dependent on mutual aid and particularly credit services. Agricultural cooperatives' income from credit services comes from interest on deposits held at Norinchukin Bank. The cooperatives therefore expect consistent high returns in terms of interest on deposits and through dividends.

On the other hand, when Norinchukin Bank has incurred massive losses due to unfavorable market conditions, cooperatives have bailed out the bank. For example, members injected ¥1.9 trillion into Norinchukin Bank in 2009, including Tier 1 capital of ¥1.4 trillion, after the bank posted material losses relating to securities during the Global Financial Crisis that started around late 2007.

Please describe the bank's financing methods and liquidity. 

Norinchukin Bank raises funds mainly from deposits from member cooperatives. We consider the bank's funding and liquidity as positive factors in our evaluation of its creditworthiness on a stand-alone basis. Deposits, received from agricultural cooperatives and their credit federations, tend to be extremely sticky. This is because articles of incorporation at agricultural cooperatives and their credit federations require them to make deposits of certain proportions at Norinchukin Bank. However, an additional interest rate on top of the standard one, called an incentive fee, is attached to deposits and accounts for a significant part of total deposit interest rates. Accordingly, the bank incurs higher funding costs than other deposit-taking financial institutions in Japan. Costs for funding from member cooperatives in fiscal 2023 (ended March 31, 2024) was 0.45%. Other than member cooperatives, the bank takes deposits from companies and nonprofit organizations such as municipal authorities related to agriculture, forestry, and fisheries.

In addition, Norinchukin Bank raises foreign-currency funds for foreign securities investments through repurchase transactions and currency swaps. It invests a large part of these proceeds in highly liquid securities. Reflecting these factors, the bank's liquidity coverage and stable funding ratios are high.

Another central financial institution of cooperatives similar to Norinchukin Bank is Shinkin Central Bank. This bank raises funds mainly through deposits from member credit cooperative banks. It maintains a stable core deposit base, backed by deposits made to cooperative (shinkin) banks from their customers. Its cost of funding from deposits was about 0.1% in 2024. We consider Shinkin Central Bank to be less integrated in its cooperative system than Norinchukin and the agricultural cooperatives are. This is because each shinkin bank has a degree of autonomy. Shinkin Central Bank also invests in foreign securities and raises funds through repurchase transactions.

Japan Post Bank also has similarities with Norinchukin Bank. It has a nationwide network of a large number of branches and securities are the main assets it holds. Japan Post Bank's deposit base is extremely stable. This is because it is diversified with small-lot deposits, mainly from individuals and small- and midsize enterprises. The interest rate on deposits at Japan Post Bank was as low as 0.02% recently. The bank has strong need for foreign currency funding for its investment in foreign securities. However, it doesn't take foreign currency deposits. Accordingly, the bank uses derivatives to eliminate a significant portion of its mismatches between yen funding and foreign currency investments.

How about Norinchukin Bank's asset-risk composition? 

Interest rates have been low in Japan for a prolonged period. Norinchukin Bank has therefore made relatively risky securities investments to realize higher yields. This is because interest on deposits from member cooperatives at the bank are relatively high. Foreign securities, mainly foreign bonds, account for a large proportion of Norinchukin Bank's investment assets. The bank holds a wide variety of investment products, such as sizable investments in 'AAA'-rated U.S. collateralized loan obligations. In addition, the composition and outstanding balance of the bank's investment portfolio changes significantly over time as it responds to market conditions.

Shinkin Central Bank also needs to invest funds deposited by its member cooperatives. However, its funding cost is closer to market interest rates in comparison with that of Norinchukin Bank. Against the backdrop, the bank's risk appetite and expected yield are not high. Given a protracted low-profit environment and fierce competition in the banking sector, Shinkin Central Bank invests mainly in the domestic government and corporate bonds, with a smaller proportion of assets invested in foreign securities and equity investment trusts.

Meanwhile, Japan Post Bank is a listed company and thus required to achieve a return on equity that exceeds its capital cost. Amid growing pressure from shareholders, the bank has maintained its risk appetite at a relatively high level. As the bank is still in the process of privatization, it is prevented from providing loan services under the Postal Service Privatization Act. This ensures the bank does not have an unfair edge over private-sector financial institutions. With these constraints, Japan Post Bank deposits funds at the Bank of Japan and in Japanese government bonds, while diversifying through foreign bonds and equity investments and enhancing the expected return of its investment portfolio. It has holdings in private equity funds and equity in real estate funds overseas.

Norinchukin Bank expects to post a net loss for in fiscal 2024. Can you comment on the bank's profitability? 

We assess Norinchukin Bank's business position as moderate, which is one notch lower than adequate. This reflects the impact that volatility of profit from market trading has on its creditworthiness. Volatility has increased as the bank seeks higher expected returns. In addition, the bank's funding balance is susceptible to changes in costs of funding in foreign currencies such as the U.S. dollar. This reflects the high proportion of foreign currency-denominated bonds on the bank's books. It has smoothed out profit levels by selling securities when needed.

We assume valuation losses and negative spreads will diminish for Norinchukin Bank, considering that the bank should benefit from overseas interest rates declining and portfolio restructuring. However, we see uncertainties because the timing and speed of any recovery in profit are highly dependent on when central banks change their monetary policies.

Japan Post Bank's profitability seems more stable than Norinchukin Bank's. An unstable funding balance stemming from changes in foreign currency funding costs for Japan Post Bank is similar to Norinchukin Bank's. However, Japan Postal Bank's investment portfolio is more diversified than that of Norinchukin Bank on a risk basis. This is because dividends from private equity funds and capital gains contribute to smoothing out of its earnings. Shinkin Central Bank's profitability is lower than that of Norinchukin Bank. However, funding costs are also lower at Shinkin Central Bank, so expected returns are too. Accordingly, Shinkin Central Bank's profit volatility is low. A recent increase in losses from bond sales at Shinkin Central Bank is attributable to realization of latent losses.

Do other Japanese financial institutions also incur material interest rate risk and face latent losses? 

In comparison with the three megabank groups, for which lending is the key business, Norinchukin Bank is exposed to very high interest rate risk. This is illustrated by its unrealized losses from its portfolio on bonds and its ratio of the delta of its economic value of equity to Tier 1 capital (delta EVE/T1). Risk is high because Norinchukin Bank's investment portfolio consists of mainly domestic and overseas bonds. We believe other major financial institutions manage their investments more prudently. They have disposed of unrealized losses from foreign bonds by selling them in the past years.

We assess the bank’s risk position as moderate, which is one notch lower than adequate. This evaluation reflects the magnitude of interest rate risk at Norinchukin Bank. We recognize the bank manages relatively high interest rate risk within the second pillar of capital requirements under regulatory supervision. We also note the regulatory supervisors have never taken any corrective measures. Meanwhile, the bank maintains its capital at a high level as a buffer against such risk, which we view positively. We believe that bank will maintain high capital after disposal of unrealized losses and reduction of interest rate risk in fiscal 2024. However, its interest rate risk volume is likely to remain higher than that of other banks.

Shinkin Central Bank is exposed to relatively higher interest rate risk, reflecting its portfolio, in which bonds are the key asset. However, in curbs increases in interest rate risk by hedging through means such as interest rate swaps. Japan Post Bank continues to carry relatively high interest rate risk in its banking book, which reflects its investment portfolio. However, its delta EVE/T1 (which were maximum values under the assumptions of downward parallel shift during fiscal 2017-2021 and steepening from fiscal 2022) has changed significantly in recent years. This is because of changes in interest rate risk on the bank's asset side and technical factors in calculations.

Related Research

• Norinchukin Bank Outlook Revised To Negative On Risk Of Delay In Recovery Of Earnings Base; 'A/A-1' Ratings Affirmed, June 28, 2024
• Japan Megabanks Set For Growth, June 16, 2024
• Norinchukin Bank Potential Losses Underline Ongoing Risks, May 21, 2024
• Japan Post Bank Co. Ltd., Sept. 24, 2023
• Shinkin Central Bank, July 17, 2023
• Japan Post's And JA's Subsidy Model Flounders, June 5, 2019

Primary Contact:	Eiji Kubo, CFA, Tokyo 81-3-4550-8750; eiji.kubo@spglobal.com
Secondary Contact:	Kiyoko Ohora, Tokyo 81-3-4550-8704; kiyoko.ohora@spglobal.com