Norinchukin Bank has become one of the biggest victims in a completely different financial world, where long-term increases in borrowing costs have dealt a heavy blow to the weakest players in the market.

This week, the fifth largest bank in Japan announced that it would sell a $63 billion low-yielding US and European government bond portfolio, surprising the market.

Norinchukin Bank stated this week that it does not need additional funding other than the planned ¥1.2 trillion ($7.6 billion) financing, despite doubling its estimate for potential losses this week.

The bank spokesman said that the bank was negotiating with member cooperatives about the planned financing and the amount of fundraising had not changed. As it seeks to rebuild its securities portfolio, the company is also considering investing in Japanese government bonds.

The Central Agricultural and Forestry Treasury has warned this week that its losses for this fiscal year may increase to 15 trillion yen, three times the estimate announced less than a month ago during the initial financing announcement, and it has announced plans to sell a low-yield portfolio of US and European government bonds totaling $63 billion.

"The capital restructuring is aimed at ensuring additional investment capacity to improve our investment portfolio." "This is not to make up for losses, so the amount will not change."

Higher long-term borrowing costs have made Norinchukin Bank's sovereign debt investment portfolio unprofitable. The spokesman said these investments are mainly financed through repurchase agreements. The portfolio is being liquidated to help the company return to profitability.

"We have decided to sell about ¥10 trillion of US and European sovereign bonds by further reviewing investment portfolios to ensure a return to profitability by FY2025."

The company may include more Japanese government bonds in its investment portfolio. Norinchukin Bank previously stated that it may increase its allocation for secured loan bonds, domestic and foreign bonds, stocks and project financing.

The spokesman said that rising yen interest rates "will increase investment opportunities in Japan, so increasing investment in Japanese government bonds is one of our options."

Issuing a long-term high-interest rate warning to the world.

Although both Norinchukin Bank and the Japanese government have expressed confidence in the bank's ability to withstand losses, this event serves as a reminder that after the collapse of Silicon Valley Bank 15 months ago, danger still lurks in the financial system. Signals from the Federal Reserve and other central banks suggesting a lack of eagerness to cut interest rates have caught many investors who bet on more aggressive moves off guard.

This has presented a challenge for institutions such as Norinchukin Bank. The bank has made large purchases of US and European sovereign bonds, expecting lower interest rates to trigger a rebound in the bond market after a two-year decline. Norinchukin Bank is currently adjusting its investment portfolio by selling one-third of its sovereign bonds and shifting to other types of assets, including secured loan vouchers and domestic and foreign bonds.

"It's surprising they didn't hedge the interest rate risk," said Philip McNicholas, an Asian sovereign strategist at Robeco Group in Singapore. "Maybe they were too confident in the Fed and the ECB cutting rates and initially thought it was just a temporary delay."

Norinchukin Bank is not the only bank to suffer losses due to incorrect bets on interest rates. Last year, Silicon Valley Bank collapsed because its large long-term bond investment portfolio lost value due to rising interest rates. These losses triggered a run on deposits and eventually spread to other regional banks such as Signature Bank and First Republic Bank.

Recently, many banks and fund managers have suffered book losses due to high long-term interest rates. The Federal Reserve has not taken action this year, despite the market expecting a 150 basis point rate cut in December last year. Regulatory agencies have stated that unrealized losses in Bank of America's securities portfolio reached $516.5 billion as of the end of March.

Western Asset Management Co., a bond giant based in California with $385 billion in assets under management, has been one of the worst-performing funds in the market because its managers insist that long-term bonds will rise as the Federal Reserve approaches to cut rates. According to data, the company's flagship fund has only outperformed 3% of its peers this year and in the past three years.

Although Norinchukin Bank has stable agricultural cooperative customers, so the risk of a run on deposits is much lower, it is facing more and more questions about how it mismanages its debt portfolio and why its expected losses are expanding so rapidly. On Wednesday, the bank's spread widened on news of increasing losses, and Japan's top government spokesperson stated that the bank's health is secure.

Makiko Oouchi, the financial and general affairs section chief of the Iwate Prefecture Agricultural Cooperative Credit Union, said, "To be honest, I am surprised at the potential size of the losses." The union is a local organization that invests deposits for local cooperatives.

Junichi Matsuda, a member of the Kyoto Forest Owners' Cooperative Association, said he was not informed of what happened recently by Norinchukin Bank. If the bank requests more funds to make up for its larger losses, "it will be a huge shock," said Matsuda, who believes this possibility is unlikely. Norinchukin Bank announced last month that it would raise 1.2 trillion yen from agricultural and other cooperatives that own it.

The century-old bank has disrupted markets before. In 2009, due to investing in asset-backed securities during the global financial crisis, the bank suffered the largest realized and unrealized losses in Asia and was obliged to raise 19 trillion yen. Norinchukin Bank is the central financial institution for approximately 3,300 agricultural, forestry and fishery cooperatives in Japan. The bank absorbs deposits from cooperatives instead of directly from farmers, and manages these funds through medium- to long-term investments.

"We will continue to closely monitor the bank's management status with the Financial Services Agency," said an official with the Ministry of Agriculture, Forestry and Fisheries. A bank spokesperson said in an email on Wednesday that the unrealized losses have been reflected in its capital ratio and will not affect the bank's health.

The bank spokesperson also said that the bank will diversify its revenue sources between Japanese and overseas assets based on market conditions, thus creating the optimal investment portfolio.

Even if the bank is able to shift to other assets, the problem of high-dollar financing costs remains. If the bank increases secured loans or corporate bonds, it will also take on credit risk in addition to interest rate risk. As of March, the company held 7.4 trillion yen in CLOs.

The Fed's stance has been tougher than many investors expected, widening the spread of corporate bond yields in June. Signs of economic weakness also continue to pose repayment risks for weaker borrowers. According to Bloomberg indices, although the excess return rate of global corporate bonds in 2024 is higher than government bonds by 1.31%, it is lower than the high of 1.74% at the end of May.

However, Norinchukin Bank said it will gradually sell its $6.3 billion in bonds before the end of the fiscal year in March, which means it can reduce losses if government bonds further rise later this year due to interest rate cuts.

Norinchukin Bank has little room to invest in stocks. According to Basel III banking rules, stocks carry higher risks and require more capital than other assets. As of March, the bank had only about 2.3% of its investments in stocks.

This thorny reform now falls on the shoulders of CEO Kazuto Oku. The company veteran has said the management will accept a pay cut and is not prepared to resign in the short term.

Editor/ping