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Japan’s Biggest Banks See Profit Declining in Second Half

Japan’s three biggest banks reported a surge in first-half profits this week that they said means the year will turn out better than expected. The second half won’t be as good.

Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho Financial Group Inc. (8411) increased their combined net income target by 23 percent to 2.26 trillion yen ($23 billion) for the year ending March, company statements showed. If they achieve the goal, second-half profit will fall 46 percent to 794.3 billion yen from the first six months’ 1.47 trillion yen and drop 43 percent from a year earlier.

The forecast for lower second-half earnings reflects the banks’ uncertainty over whether Prime Minister Shinzo Abe can sustain an economic recovery that’s been driven by government spending and a weaker yen. The Nikkei 225 Stock Average (NKY) has slid from a more than five-year high in May, while expansion of output slowed last quarter as companies eased up on capital investment, signaling loan growth may remain muted.

“The first half was too good,” Naoko Nemoto, managing director of financial institutions ratings at Standard & Poor’s in Tokyo, said by phone yesterday. “Abenomics has only given us a cheaper yen and higher stock prices and I’m skeptical that Abe’s policies will stimulate corporate investment and lead to solid loan demand.”

The higher profit targets at the three Tokyo-based banks exceeded the estimates of analysts surveyed by Bloomberg as the equity-market revival spurred sales of investment products and boosted the value of the lenders’ stakes in other companies. Fees and commissions climbed at least 20 percent in the first half from a year earlier, the reports showed.

Biggest Bank

Mitsubishi UFJ, Japan’s biggest bank, said yesterday that net income will probably total 910 billion yen this fiscal year, raising its target by 20 percent after first-half profit jumped 83 percent to 530.2 billion yen. Mizuho increased its annual forecast by 20 percent to 600 billion yen even as it grapples with a regulatory probe into loans to criminal groups. First-half profit more than doubled to 429.7 billion yen, it said yesterday.

Sumitomo Mitsui raised its forecast by 29 percent on Nov. 12 to 750 billion yen after first-half profit surged to a record 505.7 billion yen.

“Banks aren’t expecting operations that did so well in the first half, thanks to the rally in share prices, to continue that way in the second half,” Yoshinobu Yamada, a Tokyo-based analyst at Deutsche Bank AG, said by phone yesterday. “Investors’ attention is switching to how banks’ core business will fare in the second half.”

Shares Rise

Bank shares rose in early trading in Tokyo today as the Nikkei 225 climbed above 15,000 for the first time since May on the back of renewed weakening of the yen. Mitsubishi UFJ gained 0.9 percent to 651 yen at 9:33 a.m. local time. Mizuho advanced 1.4 percent and Sumitomo Mitsui increased 1.9 percent.

The stock gauge could fall about 20 percent to 12,000 if the government doesn’t do more to persuade investors its economic stimulus efforts will succeed, Norikazu Akedo, head of Japan equities at Nomura Holdings Inc., the country’s biggest brokerage, said in an interview this week. Nomura is sticking to its forecast for the measure to rise to 18,000 by the end of 2013, Akedo said.

Bank executives expressed optimism that loan growth will pick up and companies will increase investment as Abe attempts to augment his policies of fiscal spending and monetary easing with efforts to make industries more competitive.

Corporate Sentiment

“Corporate managers’ sentiment is improving,” Sumitomo Mitsui President Koichi Miyata said on Nov. 12. “If Abe executes his growth strategy, then capital spending will expand and that will generate loan demand.”

The economy’s expansion slowed for a second quarter to 1.9 percent in the three months ended Sept. 30, government data showed yesterday. The growth was fueled by government spending and an accumulation of inventories.

Loan growth at the nation’s biggest banks slowed in October for the first time since credit resumed expanding in December 2012, Bank of Japan data showed this week. Japanese banks need to expand credit to offset the lowest loan profitability in Asia as the country’s monetary easing depresses interest rates. Net interest margins at Japan’s three largest banks average 1 percent, data compiled by Bloomberg show.

Mitsubishi UFJ’s first-half lending income climbed 3.7 percent to 908.7 billion yen, yesterday’s report showed. Mizuho’s rose 0.2 percent to 534 billion yen. Sumitomo Mitsui posted a 15 percent increase to 780.3 billion yen.

Abenomics Benefit

“You can’t just conclude that banks aren’t benefiting from Abenomics just because lending income isn’t on a solid upward trend yet,” Mitsubishi UFJ President Nobuyuki Hirano told reporters yesterday.

The banks’ upward profit revisions are “conservative” and there is room for them to exceed their forecasts, Takehito Yamanaka, an analyst at Credit Suisse Group AG in Tokyo, wrote in a report today. “Further growth in domestic lending would be a positive for profits and the share price,” he wrote.

A headwind facing Japanese banks is a government probe after Mizuho was ordered to improve compliance for failing to stop loans to criminal organizations. The Financial Services Agency this month began inspections of Mitsubishi UFJ and Sumitomo Mitsui and reexamining Mizuho.

The scandal that started with Mizuho is turning into a problem for the whole banking sector, said Yamada at Deutsche Bank. Mizuho President Yasuhiro Sato and Japanese Bankers Association Chairman Takeshi Kunibe were grilled on the crime-loan issue by lawmakers in parliament this week.

“We will do our best to see that the loan issue won’t have a big impact on our fiscal-year plan,” Sato said at a briefing on the earnings yesterday. “I think the 600 billion-yen forecast is definitely achievable.”

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

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

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