Sumitomo Mitsui Banking Corporation is about to roadshow the first ever Japanese covered bond. Atsushi Ouchiyama, senior vice president, debt strategy and issuance group, treasury unit, SMBC, told The CBR about the rationale for the contractual-based deal, the Japanese RMBS collateral, and the issuer’s expectations.

What are the advantages for SMBC in being able to issue covered bonds?

Atsushi Ouchiyama, SMBC (pictured): As SMBC has been expanding lending and the scope of its business overseas as major drivers of growth in recent years, we believe that stability of foreign currency funding will be a key to further growth for our overseas business going forward. SMBC has been focusing on securing a stable and lower cost of funding source by diversifying our funding resources and currencies, as well as expanding our investor base.

You can easily understand our strategy by the fact that among Japanese banks, SMBC is the most frequent issuer in US dollars, euros and the Australian dollar market.

There have been discussions about legislation for covered bonds in Japan. Why have you decided to proceed on a contractual basis? Do you expect support from the Japanese financial authorities for this project?

Ouchiyama, SMBC: Yes, there has been discussion about legislation for covered bonds in Japan and SMBC was also involved in the discussion. As indicated in a report published in July 2011 (by Development Bank of Japan, which served as secretariat, with participation by relevant parties including major financial institutions, lawyers, and academics), Japanese banks back then had a surplus of funds due to stagnant domestic lending as well as a funding structure where funds were mainly sourced from domestic deposits. Therefore, there was no need to introduce covered bonds at that time.

However, Japanese banks have expanded overseas business and securing stability of foreign currency funding has become more important.

Currently, there is no dedicated covered bond legislation in Japan, nor have Japanese authorities mentioned the possibility of drafting and introducing such legislation in public.

However, we have already explained to the authorities about the intent and structure of this issuance in detail. We would like to encourage the authorities toward the establishment of a covered bond legislation in Japan after this product is welcomed by European investors.

What are the key messages you will be telling investors on the roadshow about:

- The Japanese mortgage market?

Ouchiyama, SMBC: We will be highlighting its stability, its magnitude, and its high quality.

If you were to pick one word to describe the Japanese mortgage market, it would be “stable”. The outstanding residential loan balance of Japan is almost the same amount as it was in 2005. The Japanese outstanding residential loan balance has been stable compared to other developed countries that experienced a doubling in size compared to 2005.

The aggregated market balance is around ¥191.9 trillion (US$1.7tn equivalent) as of March 2018, making Japan one of the largest residential loan markets around the globe.

SMBC’s mortgage portfolio shows high quality performance, with a delinquency rate of less than 0.1%, which is supported by the strong job market and stringent underwriting practices.

- Your covered bond structure, including the use of RMBS?

Ouchiyama, SMBC: The reasons why we use RMBS for the cover pool are as follows:

1. In the Japanese market, having RMBS as the cover pool better serves the interest of bondholders because the secondary market for Japanese RMBS is more liquid, compared to that of Japanese residential loans.

2. As we will conduct mark-to-market valuation of the cover pool through close-out netting, RMBS is better than residential mortgages in terms of having better liquidity in the secondary market, can be marked to market more easily, and having a large secondary buyer base.

3. When residential loans need to be sold and transferred, it is required that the mortgage borrower has to be notified, which is not necessary in the case of RMBS.

Why are you targeting a euro-denominated issue?

Ouchiyama, SMBC: The reason we are targeting a euro denominated issue is because the number of covered bond investors are the largest in euros.

Do you expect a significant Japanese covered bond market to develop after your first issue?

Ouchiyama, SMBC: It depends on how successfully we can demonstrate the concept to market participants. The residential mortgage market in Japan is one of the biggest around the globe. I believe our success will lead to a significant Japanese covered bond market.

Read our earlier coverage of the Japanese bank’s plans here:
SMBC to issue first ever Japanese covered bond

Related investor reports with cover pool information

Sumitomo Mitsui Banking Corporation: Click to visit external site.