Debt interest rates surged, tearing open the "hidden losses" of the bank! Investors are punishing Japanese regional banks with "weak positions" severely.

Analysts point out that the continuous rise in Japanese government bond yields may further widen the gap in stock performance between regional banks with weaker and stronger investment portfolios. When interest rates rise with the support of central bank policies, it often benefits banks by expanding their loan interest margins. However, investors may punish banks that hold assets that are vulnerable to rising yields due to unrealized losses on their balance sheets. The rapid increase in yields in recent weeks suggests that the performance of these bank stocks may lag further. Naoki Fujiwara, senior fund manager at Shinkin Asset Management Co., said, "Banks with expanding unrealized losses on bonds will find it difficult to adopt an aggressive investment strategy, and it can be said that this is eroding their capital." He also pointed out that banks face a certain risk of impairment, especially on ultra-long-term bonds. Banks holding a large amount of unrealized losses may need to make impairment provisions if the market value of their holdings drops by half. Compiled data shows that regional banks with relatively large unrealized losses - such as North Pacific Bank Ltd. and Senshu Ikeda Holdings Inc. - have underperformed the TOPIX Banks Index, while Awa Bank Ltd. and Hyakugo Bank Ltd., with impressive portfolio returns, have significantly outperformed the sector index. The recent increase in long-term Japanese government bond yields to levels not seen in decades have been driven by concerns about escalating energy prices due to the Middle East conflict and worsening inflation worries. Concerns about expanding fiscal spending and the government's need to issue more bonds have also contributed to the rise in yields. Yoshitaka Suda, senior cross-asset strategist at Nomura Singapore, analyzed various banks and found that in the past few years, banks with larger unrealized gains have performed better than those with weaker holdings. Given investors' vigilant stance on the sharp rise in bond yields, he believes that "this differentiation may further widen." Since the Bank of Japan started raising interest rates and normalizing monetary policy in March 2024, bank stocks have more than doubled in the past few years. However, with the recent pause in rate hikes by the central bank and the continuous rise in bond yields, regional banks with weaker capital buffers have been impacted. Nevertheless, some investors remain optimistic about the sector due to its strong fundamentals. Hiromi Ishihara, stock investment director at Amundi Japan Ltd., said that considering inflation expectations, the recent rise in long-term yields has not substantially deviated from the fundamentals. "On the contrary, in this environment, the improvement in the profitability of banks, including regional banks, is likely to become a more focused area in the market," she added.