FITCH Ratings on Thursday said Mitsubishi UFJ Financial Group's (MUFG) US$706 million investment in ride-sharing firm Grab shows growing interest by Japanese banks to expand in South-east Asia and upgrade their technology capabilities.
The ratings agency's report said the deal has potential to deliver benefits for the lender. However, it will also mean taking higher levels of risk.
The trend comes as Japanese banks face challenges in generating revenue in a climate of persistently low domestic interest rates and high competition. Thus, one approach to growth is expansion into faster-growing markets.
However, this strategy may lead to higher costs, including credit and regulatory-related compliance costs which can place pressure on profitability, Fitch said.
In addition, expanding into faster-growing emerging markets will lead to risks that need to be appropriately managed as these markets tend to be associated with weaker operating environments.
One example is MUFG's writing down goodwill on its Bank Danamon investment in Indonesia. MUFG had increased its controlling stake in the Indonesian bank in 2019.
Fitch believes MUFG's investment in Grab will not have a substantial impact on the bank's financial position as it is less than 1 per cent of the lender's tangible equity. However, it is also too early to tell whether potential benefits can be realised, Fitch noted.
Moreover, MUFG faces "significant implementation risks" as its competitiveness in Grab's key markets has yet to be proven. It is also unclear whether the deal will deliver a sustainable boost to revenues, the ratings agency added.
At this stage, Fitch views the investment as "credit neutral".