TOKYO -- Japan's three biggest banks, which together hold $13 billion of SoftBank Group debt on their balance sheets, are sticking with the Japanese technology company despite its massive investment losses as rock-bottom interest rates push them toward corporate deals and overseas lending.
"Lending decisions are made based not just on one profit-and-loss statement," Mizuho Financial Group president Tatsufumi Sakai said in an earnings announcement on Thursday. He was apparently referring to SoftBank's second-quarter loss of $6.4 billion, following a blowout profit in the first quarter.
"Decisions are made based on a close examination of the viability of a business," he added. Sakai stressed that he was not referring specifically to SoftBank, but it was clear that the statement represents Mizuho's ambition to transform itself from a traditional commercial bank into a full-fledged investment bank.
Mizuho is SoftBank's primary lender and frequently leads syndicated loans for the Japanese technology group. The nation's third largest banking group had Softbank exposure worth 597 billion yen ($5.5 billion) as of March.
SoftBank Group had about 7.6 trillion yen in interest-bearing liabilities at the end of September, comprising 2.4 trillion yen in bank borrowings and 5 trillion yen in corporate bonds. Its bonds are rated as non-investment grade, or "junk", by S&P Global and Moody's Investors Service, although not by Japan Credit Rating Agency, which rates its bonds A minus.
Mizuho has been mentioned as an investor in a second $108-billion technology investment fund that SoftBank Group said in July it would launch following its first $97-billion Vision Fund, which suffered around $9 billion of losses between July and September due to major write-downs on investments such as WeWork and Uber Technologies.
Mizuho's Sakai declined to clarify if the bank would participate in the second fund, but made a passionate case for investing in such a vehicle.
"We consider fund investment as a very important part of our business," Sakai said. "As Mizuho transforms into a new financial service company, it will no longer be just a lender of money but a business partner that shares risks together with clients."
He went on to say that Mizuho intends to create a new business around a startup fund, much as investment bankers provide mentorship to startup companies and find customers for them.
Mizuho reported a 20% jump in core profit for the April-June period to 348 billion yen ($3.2 billion). Investment banking played a big part in lifting profit, it said. Outstanding loans in Japan grew 5% to 54.5 trillion yen, as growth in corporate loans offset a decline in home mortgages.
SoftBank Group's losses have not deterred Japan's two other mega banks, either.
"We will continue to support (SoftBank Group) while examining the safety of our loans," said Jun Ota, president of Sumitomo Mitsui Financial Group, Japan's second largest banking group, in a press conference on Wednesday.
Sumitomo Mitsui is the second largest bank lender to SoftBank Group with outstanding loans totaling 448 billion yen as of March.
As for the new technology fund, Ota said, "We will decide after evaluating the risks and returns on such an investment."
Kanetsugu Mike, president of Mitsubishi UFJ Financial Group, which has a Softbank exposure of 336 billion yen, declined to comment on the bank's stance towards SoftBank. But he emphasized that MUFG is watching for rising credit risks amid the U.S.-China trade war and concerns about a bubble in technology company valuations.
SoftBank Group is a conglomerate that operates two telecom carriers in Japan and the U.S., British microprocessor designer Arm, Japanese search engine Yahoo and the technology investment fund called Vision Fund.
As well as its own debts of 7.6 trillion yen, the Japanese and U.S. telecom carriers each carry about 4 trillion yen and 5 trillion yen in debt.
Underpinning SoftBank Group's heavy debt load, however, are valuable asset holdings, valued at 27 trillion yen at SoftBank Group alone -- half of it in the form of the company's 26% stake in Chinese e-commerce giant Alibaba Group.
Japanese banks' backing for SoftBank reflects the dearth of profitable lending opportunities in Japan, as the central bank keeps interest rates at the rock-bottom level and has recently signaled its willingness to bring short-term interest rates even further below zero. Interest rate spreads on loans in Japan are depressed at below 1%, the three banks reported.
Earnings at MUFG, the nation's largest bank, remained under pressure as "Japan’s persistent ultralow interest rate environment has led to a challenging operating environment for banks in the country," said Shunsaku Sato, senior credit officer at Moody’s.
For the fiscal first half, MUFG was helped by a gain in U.S. bond prices and reported an 11% increase in core profit, the first increase in April-June profit in four years. Core profits declined 13% at Sumitomo Mitsui.
"It is difficult to grow revenue from the retail banking business in a market where the population is declining," said Sumitomo Mitsui's Ota. "We are working hard to bring down the costs of operations."
Overseas lending is another area that Japanese banks have counted on to make up for the low interest yields in Japan.
"There are more opportunities overseas than in Japan," said Ota. "There is room for growth."
He cited emerging economies and aircraft leasing as areas where the bank is keen to expand. Sumitomo Mitsui expanded overseas loans by 2% from a year ago, especially in Singapore, Taiwan and Hong Kong. Sumitomo Mitsui has a stake in Hong Kong-based Bank of East Asia and Cambodia's Acleda Bank.
MUFG also recently turned Indonesia's Bank Danamon into a subsidiary as part of an effort to boost its presence in retail banking in Southeast Asia. MUFG also owns Bank of Ayudhya in Thailand.