Japan’s three biggest banks led by Sumitomo Mitsui Financial Group Inc. (8316) forecast earnings will decline this year as monetary easing makes loans less profitable even as borrowing picks up amid an economic recovery.
Sumitomo Mitsui said net income will fall 27 percent to 580 billion yen ($5.7 billion) in the year ending March. Mitsubishi UFJ Financial Group Inc. (8306)’s profit will slip 11 percent to 760 billion yen and Mizuho Financial Group Inc. (8411)’s will drop 11 percent to 500 billion yen, they said in statements yesterday.
Bank shares sank, even after a report today showed the Japanese economy expanded the most in a year last quarter as a weaker yen boosted exports and consumer spending rose. Falling interest rates on the back of the Bank of Japan’s efforts to end deflation are curbing loan profitability, keeping net interest margins at the nation’s lenders the lowest in Asia.
“The challenge for megabanks this year is how to increase profit from lending at a time when low interest rates squeeze margins,” said Katsuhide Takahashi, a credit analyst at Citigroup Inc. in Tokyo. “They need to take advantage of their brokerage and fee businesses, which are benefiting from the market rebound.”
Sumitomo Mitsui shares dropped 3 percent to 4,770 yen at the close of Tokyo trading. Mitsubishi UFJ, Japan’s largest bank, slid 3.6 percent and Mizuho lost 3.1 percent. The Topix Banks Index (TPX) fell 3 percent, the worst performer on the benchmark Topix, which slipped 0.6 percent.
The profit projections of the Tokyo-based banks still beat analysts’ estimates, signaling they are more optimistic that credit demand will gain momentum and the equity rally will spur fee income. The surging stock market is making consumers feel wealthier, helping to fuel the economy’s 3.5 percent expansion last quarter, Cabinet Office figures showed today.
Sumitomo Mitsui’s earnings forecast exceeded analysts’ projections for 551.5 billion yen. Japan’s second-biggest bank by market value said profit surged 53 percent to a record 794.1 billion yen in the year ended March, led by income from trading securities such as government bonds.
President Koichi Miyata told reporters that he wants his bank to “aggressively” increase lending and Prime Minister Shinzo Abe’s policies will spur demand from borrowers. Lending income grew 4 percent last year, the company said.
The Topix climbed about 40 percent in the past two quarters, with Abe winning an election in December based on a three-pronged strategy of fiscal spending, monetary easing and deregulation. The government’s debt returned 2.2 percent in the period, Bank of America Merrill Lynch index data show.
Mitsubishi UFJ’s profit target exceeded the 747.5 billion yen estimated by analysts. Net income dropped 13 percent to 852.6 billion yen last fiscal year, it said.
Mizuho’s earnings projection beat the 464.2 billion yen average estimate of 17 analysts surveyed. Net income rose 16 percent to 560.5 billion yen last year, led by higher fees and commissions and trading income, the bank reported.
“Megabanks’ better-than-expected forecasts probably reflect their expectation for Abenomics to increase lending on top of profits from fees and overseas businesses,” said Naoko Nemoto, managing director of financial institutions ratings at Standard & Poor’s in Tokyo.
Mitsubishi UFJ joined Sumitomo Mitsui in raising dividends. The bigger lender boosted its payout to 13 yen a share for the year ended March from 12 yen previously, the first increase in five years. It plans a 14 yen dividend this year. Sumitomo Mitsui on April 26 announced a 20 percent increase for last year to 120 yen. It aims to pay 110 yen this year, it said yesterday.
Companies and households are borrowing more as the economy recovers from last year’s recession. Bank lending rose 2.1 percent in April from a year earlier, the fastest pace since July 2009, central bank figures showed last week.
Still, profitability on loans is shrinking. The average net interest margin at the 85 companies on the Topix Banks Index is 1.33 percent, the least in Asia, according to data compiled by Bloomberg based on their latest filings. The average interest rate on new bank loans slid to an all-time low of 0.86 percent in February, according to BOJ data.
Loan margin at the country’s banks is likely to drop this fiscal year, Takeshi Kunibe, chairman of the Japanese Bankers Association, said at news briefing in Tokyo today. The decline in loan profitability may halt when loan demand increases with the economic recovery, he said.
Not all interest rates have been falling since Bank of Japan Governor Haruhiko Kuroda unveiled his plan last month to double the monetary base in two years. Government bond yields have surged on expectations Kuroda’s measures will spark inflation, highlighting the risk that banks -- the biggest holders of the securities -- could incur losses.
Mizuho Chief Executive Officer Yasuhiro Sato told reporters that any potential increase in long-term yields will be controllable. The bank doesn’t plan to increase holdings of government bonds or foreign debt, he said, adding that it will keep the maturity of Japan notes below three years.
Mitsubishi UFJ President Nobuyuki Hirano said his bank will continue to be a stable holder of Japan’s debt.
Benchmark 10-year government bond yields fell 1 basis point to 0.84 percent at 4:49 p.m. The rate touched 0.92 percent yesterday, the highest since April 2012.
Japanese banks, which have been using their excess deposits to buy government bonds, have reduced their holdings as the central bank increases purchases. Lenders had 164 trillion yen of the securities in February, down from a record 171 trillion yen in March last year.
“Japan long-bond yields are finding where to settle after bold monetary easing,” said Kunibe, who is also president of Sumitomo Mitsui’s banking unit. “It’s hard for banks to expect high profit in JGB trading on low rates.”
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