Japanese banks' spreads widen following Nikkei tumble

Credit protection on the debt of Japan’s major banks widened this week as the Nikkei stock index hit a new 20-year low. Investors were concerned that the Nikkei 225 index's fall below the psychologically important 8,000 level - it plunged to 7,862.43 on Tuesday - would prompt banks to report larger-than-expected losses for the fiscal year due to their cross-share holdings.

The bid-offer spread on Bank of Tokyo Mitsubishi credit protection was quoted at 55-70bp on Friday, compared with 52/62bp last week. Sumitomo Mitsui Banking Corporation (SMBC) was quoted at a bid-offer spread of 90/105bp, out from 84/94bp last Friday; while Mizuho and UFJ both traded at 140/170bp on Friday, out from 135-155bp last week.

One trader noted that Mizuho credit default swaps were also hit when the bank scrapped plans to issue a portion of preferred shares to overseas investors. Instead, the Mizuho banks will raise ¥1.08 trillion ($9.1 billion) from Japanese investors.

But dealers said credit spreads on banks had faired relatively well considering the plunge in equity values. Although the fall would increase evaluation losses for the major banks by ¥2 trillion – almost the same amount of total new capital the groups are currently seeking to raise - unless stock prices fall by 40% from the March 11 close, most major banks will achieve their minimum regulatory capital, said a Standard & Poor's report issued today.

Dealers added that the market had shrugged off geopolitical uncertainties in the North Korea Peninsula and the threat of an attack on Iraq, although credit protection spreads on the country’s air passenger carriers, JAL and ANA, widened to 165bp and 180bp, respectively, out 15bp to 20bp from last week.