(Bloomberg) -- Norinchukin Bank, the Japanese lender that got stung by rising global interest rates, expects its annual loss to exceed a previous ¥1.5 trillion ($9.7 billion) projection as it steps up the disposal of unprofitable foreign bonds.
The company, one of the country’s largest institutional investors, shocked global markets in June when it disclosed plans to sell about ¥10 trillion of US and European sovereign bonds this fiscal year to stem losses from wrong-way bets on rates. It now aims to offload even more than that amount, having disposed of ¥7.5 trillion in the first half.
The steeper expected losses and accelerated asset disposals come as Chief Executive Officer Kazuto Oku said he’s preparing for growing uncertainty, including the possibility of higher US rates under a Donald Trump presidency. Oku didn’t dismiss the potential for losses to reach about ¥2 trillion, when asked during a briefing.
“In the second half, we will take deeper steps to improve our portfolio,” Oku said. There’s a risk that Trump’s policies will fuel inflation, prompting the US Federal Reserve to stop cutting rates, he said.
Norinchukin posted a net loss of ¥893.9 billion in the six months ended Sept. 30, versus net income of ¥144.4 billion a year earlier.
Oku said the bank has retained earnings of about ¥1.3 trillion that could absorb any wider losses in the second half. A return to profit next fiscal year is in sight, he added.
Traders and investors are closely watching how Norinchukin plans to reallocate its $304 billion investment portfolio. The bank will invest in bonds, stocks and project finance, as well as securitized products such as collateralized loan obligations, Chief Financial Officer Taro Kitabayashi said at the briefing.
The agricultural bank is a big investor in CLOs, which are packages of leveraged corporate loans. Its CLO holdings fell to ¥6.5 trillion as of September from ¥7.3 trillion in June, which the company said was largely due to redemptions.
Norinchukin started losing money on its overseas bond holdings when its foreign-currency funding costs surged beyond what it earned from the securities following the Fed’s aggressive rate hikes in 2022.
The bank’s bond holdings stood at ¥26.9 trillion in September, down from ¥29.8 trillion three months earlier. Unrealized losses on bonds were ¥1.51 trillion in September, dropping from ¥2.3 trillion three months earlier.
Norinchukin isn’t the only Japanese bank that suffered losses from foreign bond holdings during the Fed’s hiking phase. Still, the timing and scale of its losses stood out, prompting questions over what went wrong.
In September, Japan’s agriculture ministry convened a panel of outside experts to examine Norinchukin’s investment and governance structure. The farm ministry has joint oversight over the bank with the Financial Services Agency.
The revamping of Norinchukin’s securities holdings is expected to have ramifications on various markets, with the attention on where the bank will allocate investment money after dumping the foreign bonds.
Unlike other large banks, Norinchukin’s lending business is small and its investment portfolio makes up the bulk of its assets.
(Updates with CEO comment in the fourth paragraph)
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