Mitsubishi UFJ Lifts Profit Target as Morgan Stanley Gain Masks Loan Slump

Mitsubishi UFJ Financial Group Inc. (8306), Japan’s biggest publicly traded bank, raised its full-year profit target by 50 percent as a gain from the conversion of shares in Morgan Stanley masked a lending slump.

The 900 billion yen ($11.7 billion) goal for the 12 months ending March compares with 600 billion yen predicted previously, Mitsubishi UFJ said in a statement in Tokyo yesterday. Sumitomo Mitsui Financial Group Inc. (8316), the bank’s closest domestic rival, boosted its profit forecast to 500 billion yen as bad loans fell. Mizuho Financial Group Inc. (8411) kept its 460 billion yen projection.

The improved earnings outlook was dimmed by figures that showed lending income declined at all three banks last quarter. Spending by Japanese companies is “persistently sluggish and loan demand remains weak,” Mizuho Chief Executive Officer Yasuhiro Sato said yesterday after announcing 3,000 job cuts.

“Without the gains from the Morgan Stanley share conversion, Mitsubishi UFJ’s earnings signal that the banks can’t count on a recovery in local loan demand,” said Katsuhito Sasajima, an analyst at JPMorgan Chase & Co. in Tokyo. “Japanese banks should look to aggressively expand lending and acquisitions overseas to make their profit growth sustainable.”

Profit has been muffled by a lending rut that ended in October when loans rose 0.1 percent, the first gain in 23 months, according to Bank of Japan data. Japan’s economy grew for the first time in a year last quarter as exports recovered from a record earthquake, an expansion that is already slowing because of weakening overseas demand.

‘Very Iffy’

Shares of Mitsubishi UFJ rose 0.9 percent to 337 yen as of 1:29 p.m. in Tokyo. Sumitomo Mitsui gained 2.5 percent to 2,117 yen after yesterday announcing a share buyback. Mizuho, Japan’s third-biggest bank by market value, was unchanged at 103 yen. The Topix Banks index (TPNBNK) increased 0.7 percent, while the benchmark Topix index fell 0.4 percent.

“We expect in the very short term there will be some upward movement in the banking sector,” Brian Waterhouse, senior banking analyst at CLSA Asia-Pacific Markets in Tokyo, said on Bloomberg Television today. “But overall those sustainable earnings drivers are looking very iffy at the moment.”

Mitsubishi UFJ’s net income rose 2.7 percent to 195.5 billion yen in the three months ended Sept. 30 from a year earlier, according to figures derived by subtracting quarterly results from first-half earnings released by the Tokyo-based company. Lending income dropped 14 percent to 436.9 billion yen. Fees and commissions slipped 0.2 percent, while trading profit gained 57 percent.

Morgan Stanley (MS) Gain

In the first quarter, Mitsubishi UFJ had a 291 billion yen gain related to the conversion of the Morgan Stanley shares into common stock. The bank exchanged $7.8 billion of convertible preferred stock in Morgan Stanley for common shares, giving it a 22 percent stake that makes it the biggest common shareholder of the New York-based lender.

Sumitomo Mitsui’s net income declined 48 percent to 107.1 billion yen last quarter, according to figures derived from first-half earnings. Lending profit fell 4.5 percent to 335.5 billion yen. Fees and commissions gained 3.8 percent and trading profit slipped 1 percent.

Mizuho’s net income fell 18 percent to 158.3 billion yen in the fiscal second quarter, led by a 3.7 percent drop in lending profit. The Tokyo-based bank said it will cut 3,000 jobs by March 2016 through a planned merger of its corporate and retail lending units that is set to be completed by September 2013.

The integration of Mizuho Corporate Bank Ltd. and Mizuho Bank Ltd. is part of efforts to improve operations after a computer systems failure delayed retail transactions in the wake of the country’s March 11 earthquake.

Olympus Risk

Another risk facing the three banks is their investments in Olympus Corp., the Japanese camera and medical equipment maker that concealed losses. The banks had a combined 235.2 billion yen of long-term loans outstanding to Olympus as of March 31, according to the endoscope maker’s June 29 financial statement.

Olympus has called on its main banks to take part in a meeting on Nov. 16, Sumitomo Mitsui President Koichi Miyata told reporters yesterday.

Mizuho has lowered its classification of loans outstanding to Olympus to an undisclosed level, CEO Sato said, citing the manufacturer’s loss cover-up revealed last week.

Japanese lenders may look to open more branches in Asia and clinch buyout deals in North America next year as borrowing at home remains too weak to spur profit, said Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo. “Megabanks’ income is likely to be stagnant because the recent recovery in loan demand is too small to improve margins,” Yamada said.

Mizuho ‘Cautious’

Sato said Mizuho “must be cautious” and “very selective” about making acquisitions abroad. The lender unveiled plans in September to buy a 15 percent stake in Joint- Stock Commercial Bank for Foreign Trade of Vietnam for about $570 million.

Mitsubishi UFJ agreed to buy Royal Bank of Scotland Group Plc’s Australia-based infrastructure advisory business, Tokyo- based spokesman Shinya Matsumoto said last week. The Japanese bank, led by CEO Katsunori Nagayasu, increased lending abroad by 700 billion yen from a year earlier to 17.1 trillion yen as of Sept. 30, according to a document distributed at its earnings briefing. That’s 21 percent of the bank’s overall loans.

Sumitomo Mitsui’s banking subsidiary is targeting profit of 150 billion yen from Asia excluding Japan in the next three years, Takeshi Kunibe, chief executive officer of the unit, said in May. That would be an increase of about 50 percent, he said.

The lender is also expanding at home through its purchase of Promise Co., Japan’s second-biggest consumer finance company, for about 200 billion yen. Sumitomo Mitsui said yesterday that it plans to spend as much as 50 billion yen to buy back as much as 1.63 percent of its outstanding shares between Dec. 2 and Jan. 20 as part of the Promise transaction.

To contact the reporter on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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