Mizuho Financial Group Inc. led Japan’s three biggest banks in forecasting a drop in earnings for this year as loan growth loses momentum and returns from stock investments wane.
Mizuho, the nation’s third-largest lender by market value, said net income may fall 20 percent from a record to 550 billion yen ($5.4 billion) in the year ending March. Mitsubishi UFJ Financial Group Inc. projected a 3.5 percent decrease to 950 billion yen and Sumitomo Mitsui Financial Group Inc. forecast a 19 percent drop to 680 billion yen, statements showed yesterday.
The results underscored the challenge for the banks to boost lending profit after monetary easing to end deflation drags down interest rates, squeezing margins. An equity rally that boosted the value of lenders’ stock holdings last year has stalled, with the Nikkei 225 Stock Average slumping 12 percent in 2014 from a six-year high.
“Lending income is unlikely to increase much,” Chikako Horiuchi, a Hong Kong-based director of financial institutions at Fitch Ratings Ltd., said by phone. “Margin pressure is likely to persist given the interest-rate environment as Japanese companies remain cash-rich and competition over new lending is intense.”
Mizuho’s forecast fell short of the 552.2 billion-yen average estimate of 17 analysts surveyed by Bloomberg News. The projection by Sumitomo Mitsui, Japan’s second-biggest bank by market value, trailed the 685 billion yen predicted by analysts. In contrast, Mitsubishi UFJ’s target exceeded analysts’ 896.6 billion-yen estimate.
Shares of Sumitomo Mitsui closed 3 percent lower at 4,059 yen in Tokyo, extending this year’s decline to 25 percent, the most of the three lenders. Mizuho was unchanged and is down 11 percent in 2014. Mitsubishi UFJ rose 1.1 percent, paring this year’s loss to 16 percent.
The Nikkei 225 slid 0.8 percent today as the bank forecasts and disappointing earnings from Sony Corp. overshadowed a faster-than-estimated economic growth report. Japanese gross domestic product expanded an annualized 5.9 percent last quarter, the fastest pace since 2011, as consumers splurged before a sales-tax increase that economists expect will trigger a 3.3 percent contraction in the April-June period.
Mizuho’s net income climbed 23 percent to 688.4 billion yen in the year ended March, the highest in the Tokyo-based company’s 11-year history, according to its statement. Net interest income, or revenue from lending minus payments on deposits, rose 3 percent. Income from fees and commissions gained 11 percent, while profit from trading securities including government bonds dropped 61 percent.
Net income at Sumitomo Mitsui rose 5.2 percent to 835.4 billion yen, also a record, fueled in part by an increase in fees and commissions, the Tokyo-based bank reported. President Koichi Miyata told reporters yesterday that gains from equity-related investments and fewer provisions for bad debts, which also drove profit growth, won’t be sustainable.
Mitsubishi UFJ’s profit climbed 16 percent to 984.8 billion yen last fiscal year, led by stock-related investments and a reversal of credit costs, Japan’s biggest bank said in its statement.
Investors flocked to Japanese stocks in 2013 as Prime Minister Shinzo Abe’s efforts to revive the economy and spark inflation weakened the yen, boosting exporters’ earnings. The sales-tax increase and skepticism about the pace of promised business deregulation damped enthusiasm for equities this year.
While loans at the biggest banks have risen in the 17 months that Abe has been in office, the pace of growth is now declining. Lending gained 1.1 percent in April from a year earlier, the least since February 2013, Bank of Japan data show.
Lending profit has been hurt by the central bank’s decision in April 2013 to buy about 7 trillion yen of Japanese government bonds a month, which has crimped rates. Net interest margins for the 87 lenders in the Topix Banks Index average 1.25 percent, the least in Asia, according to data compiled by Bloomberg.
Mizuho Chief Executive Officer Yasuhiro Sato said he expects credit to keep growing this year, while net interest margins probably won’t improve.
“Loan volume is likely to increase, but spreads won’t widen,” Sato said at a news briefing yesterday. “Overall, it’s a slight plus.”
Weak loan profitability has prompted Japan’s biggest banks to look abroad for higher yields. Mitsubishi UFJ President Nobuyuki Hirano yesterday repeated a goal of becoming one of the top 10 banks in the U.S. by 2016.
“Outside of Japan, we will focus on the two major markets: the U.S. and Asia,” Hirano told reporters in Tokyo.
Mitsubishi UFJ and Sumitomo Mitsui are weighing whether to bid for Bank of New York Mellon Corp.’s corporate trust arm, people with knowledge of the matter said this month. The unit could fetch at least $2.5 billion, a person familiar with the situation said last month.
Mitsubishi UFJ purchased Thai lender Bank of Ayudhya Pcl for about $5 billion in December, its biggest acquisition in Asia outside of Japan, and Sumitomo Mitsui agreed to buy 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion last May.
“Overseas operations remain important for Japanese banks so that they can look for wider spreads there,” Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA, said by phone. “An increase in loans outside of Japan will improve margins and keep supporting their overall income.”