- Countries dependent on China trade and resource prices slowing
- Bank retains `Asia-centric' strategy, commitment to region
Sumitomo Mitsui Financial Group Inc.’s top executive said the Japanese lender needs to be cautious in its drive to boost lending in Asia, as a slowdown in China and the slump in commodity prices cloud the region’s economic outlook.
While the bank’s President Koichi Miyata said he has no intention of changing his firm’s strategy of focusing on Asia, he expects it to be difficult to grow the bank’s Asian loan book for a while.
“China is slowing, natural resource prices are falling, and there’s also the issue of slowing in countries that are highly dependent on trade with China,” Miyata, 62, said in an interview earlier this month. “A cautious approach is going to be needed with regard to credit in Asia for the time being.”
Japan’s second-largest lender by market capitalization said when it started its current three-year plan in March 2014 that it would become a “truly Asia-centric institution” by boosting loans and profit in the region to make up for reduced earnings at home, where revenues have been hurt by a shrinking population and near-record low interest rates. The check to those plans from China’s stock market rout and falling gross domestic product growth rates across Asia is only a temporary one, Miyata said.
“There is no change in my confidence that Asia will be the core of our business in five to 10 years time, and there’s no change to our long-term commitment to the region,” said Miyata. “I believe China’s economy will have a soft landing and oil prices and markets will stabilize toward next summer.”
The Asian slowdown is affecting profitability at Sumitomo Mitsui and Japan’s other large banks, according to Rie Nishihara, a senior analyst at Mizuho Securities Co. in Tokyo.
“The shift in loan growth from emerging Asia, where margins are larger, to advanced markets such as North America has put pressure on interest income at Japan’s big banks,” Nishihara said, noting that the lenders’ profits on overseas lending fell for the first time in four years in the six months ended Sept. 30 this year.
After more than doubling to 18.9 trillion yen ($156 billion) between March 2012 and March 2015, Sumitomo Mitsui’s overseas loan balance grew by only 4.8 percent, to 19.8 trillion yen, in the half to September. Excluding the effects of exchange rates, lending growth in Asia was close to zero in the latest six-month period, with the increase driven instead by the Americas and Europe. Loans grew by 700 billion yen in each of those two markets.
Sumitomo Mitsui is still searching for ways to revive growth in Asia, and Miyata raised the bank’s recent initiatives in Indonesia and India as examples. Using Bank Tabungan Pensiunan Nasional, of which it holds 40 percent, Sumitomo Mitsui started mobile-banking services in Asia’s third-most populous nation in April. Miyata said the Indonesian bank has already added “tens of thousands” of new accounts, and he plans to use the expertise gained to develop services in other countries, such as Myanmar.
Meanwhile, Miyata said he wants to expand the bank’s network in India, where Sumitomo Mitsui has only one branch, in New Delhi, lagging other large Japanese lenders. He said the bank will open more branches in other Indian cities when it gets approval from the local regulators, and aims to capture business with Japanese companies involved in the “giant” infrastructure projects the country will need going forward.
Still, some of the bank’s challenges in Asia were illustrated in the 55 billion yen charge that Sumitomo Mitsui took in September as a result of the 31 percent plunge in Bank Tabungan’s share price. The writedown was a major factor in the Japanese bank’s 19 percent decline in first-half profit.
Sumitomo Mitsui is also looking for ways to grow through acquisitions. The lender announced on Dec. 15 that it bought General Electric Co.’s Japanese leasing business for 575 billion yen, its second purchase of GE assets this year.
The purchase “gives us access to customers we couldn’t otherwise reach, it gives us expertise such as automated screening, and it gives us better access to overseas business,” Miyata said. “What I’m interested in here is making Sumitomo Mitsui Japan’s most profitable leasing company.”
Shares of Sumitomo Mitsui fell by 1.4 percent at 2:32 p.m. on Friday in Tokyo, paring this year’s gain to 2.7 percent. Japan’s 86-member Topix Banks Index declined 1.6 percent.