A pedestrian walks past the signs of Bank of Tokyo-Mitsubishi UFJ (L), Mizuho Bank (C) and Sumitomo Mitsui Banking Corporation in Tokyo, Japan, November 12, 2015. REUTERS/Yuya Shino

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TOKYO, April 22 (Reuters) – When Japan’s biggest banks helped finance a $34 billion deal for medical supplies maker Medline last year, one of the biggest leveraged buyouts since the financial crisis , reputedly cautious lenders have signaled their ambitions in riskier and more lucrative areas. , low-quality US debt.

Mitsubishi UFJ Financial Group Inc (8306.T), Mizuho Financial Group Inc (8411.T) and Sumitomo Mitsui Financial Group Inc (8316.T), hungry for yield overseas after years of zero rates at home, boosted their operations in the United States and are now targeting businesses there by lending to lower-rated borrowers and underwriting junk bonds.

But their timing – when interest rates rise and the high-yield debt market slows – means they will face rising risks and falling opportunities, testing their stamina.

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“We will have to closely monitor market developments after the latest contraction,” said Shinichi Sato, chief executive of Mitsubishi UFJ, Japan’s biggest lender.

However, he was positive about the outlook: “The non-investment grade financing market will probably remain on a growth trend.

Japan’s big banks still have a long way to go to become major players in the market.

Mitsubishi UFJ, which has a tie to Morgan Stanley (MS.N), had a 1.6% share of an estimated $18 billion fee in the lower-grade debt market last year, according to Dealogic, the most of all Japanese banks.

It aims to move up five places in the lower-grade bond and loan syndication rankings over the next two years, to 12th place.

Since lower quality borrowers are seen as more likely to default, deals require careful consideration of local conditions, bankers said.

Developing this expertise has been a challenge for Japanese banks, requiring greater reliance on local staff and embracing a rapidly changing corporate culture, they say.

Mizuho expanded its presence in the United States following its 2015 acquisition of Royal Bank of Scotland’s North American corporate loan portfolio, where it also recruited some 150 former RBS bankers.

“American banks and investment banks are at the forefront in terms of business models and governance, and we have grown our presence with talented bankers joining Mizuho,” said Yusuke Kasamatsu, a senior banker at Mizuho.

“We took their point of view into account and improved our game.”

He strengthened his connections with higher-quality clients and then approached lower-rated borrowers while deepening his knowledge, Kasamatsu said.

Rivals have noticed Mizuho’s profits from US operations jumped in 2020, a senior executive at another megabank said.

“The RBS deal changed their culture,” the executive said, declining to be identified due to the sensitivity of the subject. “They sped up the due diligence process and tightened risk controls. Former RBS bankers told them what needed to be changed and they listened.”

Its U.S. securities business more than doubled profits to 60 billion yen ($467 million) in the year to March 2021, after tripling a year earlier.

Its share of the high-yield fee pool is 1.5% and has doubled in three years, according to Dealogic.

Sumitomo Mitsui took a 5% stake in Jefferies Financial Group Inc (JEF.N) last year, in part to target high-yield deals.

“Because our US capabilities were weak, we were unable to take full advantage of buoyant capital markets” that helped boost Mizuho, ​​Sumitomo Mitsui CEO Jun Ohta said in a December interview.

But expansion in the United States, and particularly in the high-yield debt market, will pose new risks for major lenders.

The Bank of Japan took notice, saying exposure to high-risk assets, though low, could burden lenders with unexpected losses.

As banks seek to increase fee income, they need to “assess the quality and risk of their portfolios”, the central bank said recently.

While Japanese financial institutions typically hedge against default risk by selling loans in the secondary market, they have already been stung on Wall Street.

In the collapse of hedge fund Archegos Capital last year, Nomura Holdings (8604.T) suffered a $2.9 billion hit. During the subprime mortgage crisis, Mizuho was the hardest hit of Japanese banks, losing some $6 billion.

At the Financial Services Regulatory Agency, an official said it was “reasonable” for banks to enter the high-yield market overseas after gaining experience with quality debt.

“It is also important to strengthen the risk control framework in accordance with their strategies, and we are monitoring it closely,” said the official, who declined to be identified by name.

Banks need to know how much risk they can bear in times of market distress, said Rie Nishihara of JPMorgan Securities in Japan.

In such cases, there is a difference in speed between tier 1 and tier 2 banks in accessing information, she said, pointing to the collapse of Archegos, where tier 1 investment banks are came out relatively unscathed.

($1 = 128.3900 yen)

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Reporting by Makiko Yamazaki and Yuki Nitta; Editing by David Dolan and Edmund Klamann

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