December 25, 2012 / 8:07 AM / in 5 years

TEXT-S&P report: Japan's nonbanks look to Asia for new growth

(The following statement was released by the rating agency)

Dec 25 - Japan’s nonbanks are pushing to expand their operations in Asia as they seek new opportunities to counter a shrinking domestic market, Standard & Poor’s Ratings Services said in a Japanese-language report published today. The expansion comes as domestic business slows in the face of a protracted economic downturn and changes in regulations and accounting standards. In our view, although overseas business expansion may create new earnings opportunities, it also poses the challenges of adequately managing various risks that are specific to each market, as well as financial risks. Standard & Poor’s expects nonbanks’ Asian operations to have a growing influence on their business performance and finances as they expand. The report examines some of the Asian operations at the nonbanks that we rate. Rated nonbanks include consumer finance, credit card, and leasing companies.

Standard & Poor’s expects the expansion of Asian operations to generally contribute to enhancing profits at the nonbanks for the time being. Asian operations generally incur higher credit costs and financing costs compared with domestic operations. Yet, the costs are well absorbed by relatively high interest rates, and Asian operations generally have higher profitability than domestic operations, in our view. However, business in emerging markets that are considered growth are susceptible to so-called country risks, which include rapid changes in the business environment. Striving for self-sustaining and stable revenue growth through adequate risk management is key for nonbanks to maintain their credit profile, in our view, because domestic operations are suffering declines in their capacity to absorb losses with earnings.

Standard & Poor’s believes that the rated nonbanks have thus far adequately managed the risks associated with their Asian operations. In view of the nonbanks further increasing the proportion of their Asian business, however, the nonbanks are challenged to boost their capacity to comprehensively manage country and credit risks. Furthermore, stabilizing funding sources will be key given increased demand for funds in local currencies. We believe the negative effects on credit quality could easily outweigh the positives if companies were to rapidly increase exposure by prioritizing business expansion without addressing these issues.

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