Mitsubishi UFJ, Japanese Banks Beat Estimates on Declining Bad-Loans Costs
Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, led the nation’s banks in beating analysts’ profit estimates this week as bad loan costs fell and business confidence rose to a two-year high.
Net income more than doubled to 166.3 billion yen ($1.9 billion) at Mitsubishi UFJ, while Mizuho Financial Group Inc. returned to profit, and earnings at Sumitomo Mitsui Financial Group Inc. tripled. Bond trading also rose at the three banks.
Japanese corporate bankruptcies fell for an 11th straight month in June as the world’s second-biggest economy recovers and confidence improves among the nation’s manufacturers. The decline in corporate failures allowed banks to bolster profits, offsetting a decline in loan income after debt markets thawed.
“The bottom line at banks is being enhanced by the massive swing factors of bond-related gains and lower provisions,” said Ismael Pili, a Tokyo-based analyst at Macquarie Group Ltd. “There is no loan growth and margins are under pressure, so although there’s earnings growth it’s of an inferior kind.”
Bad-loan costs dropped the most at Mizuho, falling by 95 percent to 3.7 billion yen, as banking units wrote back earlier provisions. Charges at Mitsubishi UFJ dropped 63 percent and by 73 percent at Sumitomo Mitsui.
The government said on July 21 that the economy is “picking up steadily” after sentiment among the nation’s largest manufacturers rose to a two-year high in June, according to the Bank of Japan’s Tankan survey. Corporate bankruptcies fell by 19 percent last month from a year earlier, according to data from Tokyo Shoko Research Ltd.
European Banks
European banks also posted improved earnings this week, with UBS AG, Switzerland’s biggest bank, and Deutsche Bank AG, Germany’s largest, reporting second-quarter profits that surpassed analysts’ estimates and helped drive financial shares higher.
UBS had net income of 2.01 billion Swiss francs ($1.93 billion), its third straight profit, on a rebound at the investment bank. Deutsche Bank said earnings rose 6.4 percent from a year ago to 1.16 billion euros ($1.51 billion), buoyed by retail and transaction banking.
The average estimate for Mitsubishi UFJ’s profit was 125 billion yen, 126 billion yen for Mizuho, and 110 billion yen for Sumitomo Mitsui. Mitsubishi UFJ maintained its 400 billion yen profit target for this year, while Mizuho is targeting 430 billion yen and Sumitomo Mitsui 340 billion yen.
“We’ll likely see a weak improvement in earnings at banks this year rather than a real recovery,” said Chikako Horiuchi, a Tokyo-based analyst with Fitch Ratings Ltd.
U.S. Acquisitions
Mitsubishi UFJ and Sumitomo Mitsui are turning to U.S. bank acquisitions to help offset declines in domestic borrowing. Net interest income, comprised mainly of lending returns, fell at the two banks and at Mizuho, which is looking to Asia for expansion.
Japanese lending fell 2.1 percent, a seventh straight month, in June to a six-year low, according to the Bank of Japan, as companies issued more bonds and used available cash for growth.
Mitsubishi UFJ may spend more than 500 billion yen to acquire more U.S. banks, Tatsuo Tanaka, deputy president of the group’s main banking unit said earlier this month.
Sumitomo Mitsui may spend as much as $5 billion to buy a stake in a U.S. bank in the next three years, Hiroshi Minoura, head of international banking at the company’s Sumitomo Mitsui Banking Corp. unit, said earlier this month. The bank agreed to invest about $295 million in India’s Kotak Mahindra Bank Ltd. last month.
The Basel Committee on Banking Supervision softened some of its proposed capital rules this week, further buoying bank stocks. The panel agreed to allow certain assets, including deferred tax assets, to count as capital.
“Changes in the restrictions by the Basel Committee will boost the common equity capital ratio by about 1 percent at Japanese mega banks,” according to Shinichi Ina, a Tokyo-based analyst at Credit Suisse Group AG in a report July 27. “Relaxation of the regulations will remove remaining concerns about equity capital increases.”
To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net
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