This is the biggest risk Japanese megabanks have to face in 2014

Blame it on exposure to securities investments.

Fitch Ratings says in a new report that the Sector Outlook for Japanese mega banking groups in 2014 is Stable, although there are growing expectations that Japanese economic growth will pick up after the government put in place new economic policies (the so-called "Abenomics"). 

This is based on the agency's view that strong sentiment surrounding the new policies alone will not be enough to drive strong credit growth in the domestic market, and that core earnings will improve only modestly and will be unlikely to exceed Fitch's expectation.

Here's more from Fitch Ratings:

Fitch may revise the Sector Outlook to Positive should Japan's economic reforms lead to stronger and sustainable loan demand due to higher retail consumption and capital investments by the corporate sector, which would be translated into the banks' better prospects for core profitability growth and internal capital generation.

The banks' key risk continues to be the high sensitivity of their profits and capital to market fluctuations because of their exposure to securities investments. The banks are likely to reduce their bond investments at a slower pace if their domestic loan growth does not improve. In this regard, the banks' offshore operations will mostly likely be their main growth driver, although overseas credit growth is expected to moderate.

Banks are also unlikely to reduce strategic equity holdings beyond their modest targets to avoid potential loss of business opportunities. Instead, there is a risk of banks that have already met their original medium-term targets (about 25% of Tier 1 capital) increasing equity-related investment.

Fitch believes increasing optimism about Japan's economy will slow the pace of capital retention. This is because investors are increasingly expecting higher dividends, and bank managements are more inclined to meet these investor expectations as they are more confident about meeting tighter capital requirements. Better capital flexibility also gives the banks options for overseas acquisitions, which may damp prospects of strengthening capital buffers.

Fitch expects the mega banks to issue their first Basel III-compliant hybrid capital instruments and/or subordinated debt in 2014. Banks had an aggregate JPY5trn of legacy additional Tier 1 hybrid capital (2.3% of risk assets) and JPY6trn of subordinated debt (2.7%) at end 1HFYE14 that are subject to regulatory phase-out.