TOKYO • The Bank of Japan (BOJ) has expressed concern that some banks may take excessive risks to maintain profitability while the ability of others to lend could weaken, following the introduction of its negative interest rate policy.
Banks are less able to make up for declining profitability of domestic lending as the areas that had supported earnings - such as low bad- loan costs, increased fees and commissions, and overseas loans - are all showing signs of fading, the central bank said yesterday in its semi- annual financial system report.
"It is necessary to examine both the risk of overheating - excessive accumulation of macro risks and exuberant asset prices - and the risk of a gradual pullback in financial intermediation due to a persistent decline in profits," it said.
Bank shares are the worst performers in Japan this year after the BOJ started charging them for some of their deposits as part of its efforts to vanquish decades of deflation.
SMBC Nikko Securities analyst Masahiko Sato estimates that profit at the average regional lender could plunge 90 per cent to zero by March 2023 if the policy continues.
"Monetary policy is putting regional bank earnings under intense pressure," Mr Sato wrote in a report yesterday. "The policy is meant to boost the Japanese economy, but does so at the expense of financial institutions."
The BOJ modified its monetary easing programme last month to control bond yields in a move that analysts said was prompted by concerns over financial institutions' profitability. "If the recent trend of declining profits persists, the number of financial institutions experiencing an erosion of their loss-absorbing capacity could increase," it said.
The number of banks, particularly regional lenders, that are unable to cover their expenses with interest income and revenue from fees and commissions has been increasing, said the central bank.
At the same time, some banks may shift towards "excessive risk- taking" to maintain profitability as earnings from loans and securities investment decline because of low and negative rates, it said.
An area requiring close attention is lending to the real estate sector, which has outpaced credit growth in other industries, according to the BOJ. Commercial land prices in Japan's three biggest cities rose for the fourth year, a Land Ministry report showed last month.
"Although the real estate market does not appear to show signs of overheating on the whole, it's been observed that some transactions in metropolitan areas took place at lofty prices and came with low investment yields," said the BOJ.
It kept its assessment that Japan's financial system "has been maintaining stability".