Sumitomo Mitsui Banking Corp. plans to set up a credit derivatives operation in the coming months for trading and hedging credit risk on its JPY77 trillion (USD650 billion) loan book. Yamamoto Toru, v.p. and head of the portfolio management department in Tokyo, said he will spearhead the effort, "hopefully [starting] within six months."
The bank is looking at credit derivatives now because its exposure to certain corporates, which he declined to name, doubled when the Sumitomo Bank merged with Sakura Bank earlier this year. "Credit derivatives products are a tool that will allow us to optimize our credit portfolio," said Toru. He explained that it does not want to stop loans to its customers because this would damage its relationship with its customers. Credit derivatives allow it to maintain these relationships and reduce the credit risk. He will look to start implementing systems to begin using the products as soon as the dust settles on the merger but will not enter the market until liquidity increases. Toru thinks liquidity will improve quickly, as Japanese companies are becoming increasing sensitive to deteriorating credit quality in the Japanese economy.
He added that SMBC will first buy credit protection to hedge credit exposure on the bank's high-risk loan portfolio. Toru continued that the bank will then look to trade credit default swaps to boost the department's profits. He added that he will likely begin hiring in the next few months for the operation, most likely traders, though the specifics have yet to be worked out.
"The proof is in the pudding," noted one credit derivatives dealer at an international firm in Tokyo, who doubts SMBC will become a major player. However the trader added that if SMBC does become an active player it would boost liquidity.
