Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho Financial Group Inc. (8411) may raise their annual profit forecasts this week as Japan’s economic and stock-market revivals fuel loan growth and fee income.
Japan’s second- and third-largest lenders by market value have already achieved 75 percent of their targets for the year ending March 2014, according to analysts surveyed by Bloomberg News before first-half earnings are reported this week. Analysts at BNP Paribas SA, Barclays Plc and Daiwa (8601) Securities Group Inc. say the Tokyo-based banks will raise their projections.
Prime Minister Shinzo Abe’s campaign to end deflation helped Japan stocks become the best performers in the developed world this year, spurring banks’ sales of investment products and boosting the value of their shareholdings. Lending at major banks rose for an 11th month in October, Bank of Japan figures showed today, as companies grow more optimistic about the recovery of the world’s third-largest economy.
“Banks tend to be conservative when they forecast their earnings,” Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas, said by telephone. “But this year, they will have to revise up their earlier projections, given that they’ve come this far.”
Sumitomo Mitsui probably booked net income of 480 billion yen ($4.9 billion) for the six months ended Sept. 30, the lender said last month in a preliminary earnings statement. That’s 83 percent of the company’s 580 billion-yen full-year goal. At Mizuho, which is under investigation for lending to crime groups, interim profit was probably 378.5 billion yen, 76 percent of its 500 billion-yen annual forecast, according to the average estimate of seven analysts surveyed by Bloomberg News.
Mitsubishi UFJ Financial Group Inc. (8306), Japan’s largest bank, will probably have net income of 465.5 billion yen for the first half, or 61 percent of its 760 billion-yen full-year target, lagging behind its smaller competitors, projections of six analysts in a separate survey showed.
Sumitomo Mitsui is scheduled to announce earnings results tomorrow and reports from the other two megabanks are due on Nov. 14. Spokesmen for Sumitomo Mitsui and Mizuho declined to comment on possible revisions to their profit forecasts.
Shares of Sumitomo Mitsui rose 2 percent to 4,770 yen at the close in Tokyo today, extending this year’s advance to 53 percent, the best performance among the three megabanks. Mitsubishi UFJ gained 0.8 percent and is up 33 percent in 2013. Mizuho rose 1 percent and has advanced 32 percent this year, trailing the benchmark Topix Index’s 38 percent increase.
Investor enthusiasm waned in recent months, with the Topix sliding about 7 percent from a May 22 peak amid skepticism over whether Abe will succeed in pushing through policies to make Japan more competitive -- the “third arrow” of his strategy that includes fiscal and monetary stimulus. Nomura Holdings Inc. (8604) and Daiwa, Japan’s biggest brokerages, last month posted lower quarter-on-quarter profit as stock trading volume fell.
Still, Japanese companies’ renewed appetite for borrowing has bolstered banks’ lending income even as loan profitability languishes.
Lending by major banks increased 1.7 percent in October from a year earlier, the Bank of Japan said today. Net interest margins at the three megabanks average 0.99 percent, the lowest in the Asia-Pacific region, data compiled by Bloomberg show, as asset purchases by the central bank depress interest rates.
“If Abe’s growth strategy succeeds in driving borrowing demand, lending volume can offset declines in loan margins and have a positive impact” on banks’ earnings, said Tetsuya Yamamoto, a Tokyo-based senior analyst at Moody’s Investors Service. He expects to see an upsurge in funding demand next fiscal year.
Confidence among Japan’s large manufacturers climbed to the highest since the onset of the global credit crisis in 2007, the central bank’s quarterly Tankan survey showed on Oct. 1. The Bank of Japan last month maintained its commitment to unprecedented monetary easing and said inflation will almost match its 2 percent target in the year starting April 2015.
Sameshima at BNP Paribas expects Sumitomo Mitsui’s annual profit will amount to 770.7 billion yen, compared with a record 794.1 billion yen in the year ended March. Net income at Mizuho will probably climb to 645.5 billion yen from 560.5 billion yen, Sameshima said, while he sees Mitsubishi UFJ’s sliding to 836.2 billion yen from 852.6 billion yen.
The banks may also have benefited from a drop in company bankruptcies, reducing the amount of cash set aside for bad loans. Business failures fell for an 11th month in September, Tokyo Shoko Research Ltd. data show. Credit costs at Sumitomo Mitsui’s lending unit were 80 billion yen lower than it previously forecast as it helped corporate borrowers improve management, according to the preliminary earnings statement.
Revelations that Mizuho failed to cancel 200 million yen of loans with gangsters made through a consumer credit affiliate remain a concern for investors despite its earnings resilience, according to SMBC Nikko Securities Inc.
Japan’s Financial Services Agency, which ordered Mizuho to bolster compliance on Sept. 27, is examining the bank’s business improvement plan before deciding any further action. The regulator is also conducting fresh inspections of the bank, along with its bigger rivals. Lawmakers plan to question Mizuho President Yasuhiro Sato in parliament on Nov. 13.
“There is a good chance that Mizuho will raise its full-year profit forecast and dividend payouts,” said Shinichiro Nakamura, a Tokyo-based analyst at SMBC Nikko. “But uncertainty over the bank’s governance regarding the affiliate loan problem is increasing at the same time. I expect investors to be more susceptible to bad news for the time being.”
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