Japan Banks Seen Losing Profit Driver as Asia Economies Slow

  • Net income of megabanks fell 24% last quarter, survey suggests
  • Banks probably still on track to reach full-year profit goals

Japan’s three biggest lenders will probably report a drop in second-quarter profit after Asia’s economic slowdown weakened overseas loan growth and global financial-market volatility crimped fee businesses.

Combined net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. fell 24 percent from a year earlier to 597 billion yen ($4.8 billion) in the three months ended Sept. 30, according to calculations based on the average of five analyst estimates compiled by Bloomberg.

A sharp tapering of credit growth abroad this year is undermining profit for Japan’s largest banks, which have been expanding overseas in search of higher returns as near record-low interest rates squeeze lending income at home. Turmoil in world stock markets stemming from China since August spooked Japanese individuals from whom banks had been earning fees by selling investment products.

“Loans really aren’t growing at all in Asia,” said Takashi Miura, a Tokyo-based analyst at Credit Suisse Group AG. “If you look closely you could see it slipping in the first quarter and I don’t think there’s been much growth in the second.”

Miura also said that banks probably faced a drop in consumer demand for investment trusts in the quarter. Earnings from bond trading and clawbacks of excess provisions for bad loans won’t have provided the boost they did a year earlier, he added.

Sumitomo Mitsui probably recorded the steepest decline in profit, with analysts anticipating that the lender took an impairment charge from its investment in PT Bank Tabungan Pensiunan Nasional after the Indonesian company’s shares dropped. Earnings at Japan’s second-biggest lender by market value fell 41 percent to 146 billion yen, according to analysts’ estimates.

Profit at Mitsubishi UFJ, the nation’s largest bank, probably slid 21 percent and Mizuho’s decreased an estimated 8.8 percent. The projections were calculated by subtracting first-quarter results from analysts’ estimates for the six months ended September. The three banks are scheduled to report results on Friday in Tokyo.

Asian Expansion

“Demand for funding has boosted domestic loan volumes, but profitability remains tough as spreads continue to fall,” Yasuhiro Sato, chairman of the Japanese Bankers Association, said at a news briefing on Oct. 15. Banks’ results were probably “reasonable” in the second quarter, and their second-half performance is likely to depend on the direction of the global economy, Sato said.

Japanese banks have been expanding in Asia through acquisitions such as Mitsubishi UFJ’s 2013 purchase of Bangkok-based Bank of Ayudhya Pcl. This year, Asian economies from Thailand to Malaysia have been cooling as commodity prices slump and China’s slowdown deepens, damping demand for loans. Prospects for a U.S. interest-rate increase have also weakened currencies in the region, reducing the incentive to borrow in dollars.

Loan growth at overseas branches of Japan’s so-called city banks, which include the three largest lenders, slowed to 6.8 percent in the first eight months of 2015 from 25 percent for all of 2014, according to Bank of Japan data.

Other global banks have been affected by the slowdown in Asia. Standard Chartered Plc, which gets most of its revenue from the region, announced plans last week to cut 15,000 jobs and pare risky assets in markets such as India and China after posting a surprise quarterly loss. Australia & New Zealand Banking Group Ltd. began reducing its trade-finance business in Asia to protect margins and bolster returns, results showed last month.

Yen Effect

Another reason why Japanese banks’ overseas loan growth has slowed is that the yen’s depreciation since 2012 has eased this year. Declines in the Japanese currency have increased the value of their dollar-denominated loans and profits earned abroad when accounted for in yen.

“The weak yen has been a driver in overseas business year-on-year up to the end of the first half,” said Maoki Matsuno, a Tokyo-based analyst at Barclays Plc. “With these effects dropping off and the need to consider credit risk, banks won’t be able to grow volume at the rapid rates they have up to now.”

While Japanese banks haven’t had notable losses on loans overseas, there are “potential downside risks” given the slower pace of growth abroad, Matsuno wrote in a report in October.

Even with earnings probably falling last quarter, the three Japanese lenders will still have achieved 56 percent of their combined annual profit goal, according to the analysts’ estimates. Mitsubishi UFJ, which earned a record 1.03 trillion yen last fiscal year, set its full-year net income target at 950 billion yen. Sumitomo Mitsui forecasts profit will rise to 760 billion yen and Mizuho projects an increase to 630 billion yen.

Rising Shares

Shares of the three banks have climbed at least 19 percent this year. Sumitomo Mitsui rose 1 percent at 12:45 p.m. in Tokyo and Mizuho gained 0.3 percent, while Mitsubishi UFJ slipped 0.2 percent.

“Although market and fee income have slowed since the market adjustment in August, banks have make good progress toward their full-year plans,” said Rie Nishihara, a Tokyo-based senior analyst at Mizuho’s securities unit. “But there is potential for the effects of slowing in emerging economies to materialize going forward, so we will have to watch them closely.”

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