Clouds Lifting for Japan’s Banks as Negative Rates Stay Put

Will Markets Be Disappointed Over Japan’s Stimulus Plan?
  • Combined net income fell 28% at three megabanks last quarter
  • Analysts say BOJ unlikely to take rates further below zero

The Bank of Japan’s decision not to drag interest rates further below zero provides relief for the nation’s banks after shrinking lending profits crimped first-quarter earnings.

Combined net income at Mitsubishi UFJ Financial Group Inc. and its two megabank peers fell 28 percent from a year earlier to 505.8 billion yen ($4.9 billion) in the three months ended June 30, the first full quarter under negative rates. Their net interest income slid 15 percent as the BOJ’s policy squeezed margins on loans and income from securities investments.

Bank shares rallied following the BOJ’s announcement on Friday, with the Topix Banks Index having the biggest two-day gain since February after central bank Governor Haruhiko Kuroda also ordered a review of its policies. The industry group had been the worst performer in Japan this year as investors worried that the monetary authority would deepen negative rates even after facing criticism over the policy’s impact on bank profits.

“Absent any major macro factors, all three banks look to be on track to meet their full-year forecasts,” said Michael Makdad, a banking analyst in Tokyo at Haitong International Securities Group Ltd. “The BOJ’s announcement of a policy review suggests we’re starting to look past the overhang of negative rates from early this year and set to move into a new phase.”

MUFG, the nation’s largest lender, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. all left their full-year profit targets unchanged in their earnings reports released since last week. The three banks finished the first quarter having made 24 percent progress toward the combined goal.

Here are the key figures for each bank:

  • MUFG’s net income fell 32 percent to 188.9 billion yen, missing analysts’ estimates for 225 billion yen.
  • Sumitomo Mitsui’s profit slid 31 percent to 184.3 billion yen, exceeding the 172.8 billion yen estimated.
  • Mizuho’s profit fell 16 percent to 132.6 billion yen, beating estimates for 116.8 billion yen.

Bank shares retreated in Tokyo on Tuesday, with MUFG dropping 3 percent at 10:12 a.m. local time. The Topix Banks Index declined 2 percent, having advanced 10 percent in the previous two days.

Instead of expanding negative rates, as many market-watchers had predicted, the BOJ boosted its purchases of exchange-traded funds and doubled the scale of a program to support banks’ U.S. dollar lending. Analysts and economists say this may reduce the chance of the rate being taken further below zero.

Avoided Hit

“An expansion of negative rates to 0.3 percent could have caused a hit of 500 billion yen to the banking sector in terms of loan business alone,” said Nana Otsuki, chief analyst at Monex Group Inc., a Tokyo-based online securities firm. “The share market has responded positively to this, which has lifted the overall Tokyo market.”

The central bank’s review at its September meeting will focus on the effects of its policies on the economy and prices, as it continues to fall well short of its 2 percent inflation target.

For a quick explainer on what is known about the BOJ’s review, click here.

To be sure, Kuroda said at his press conference on Friday that the central bank hasn’t reached its limit for cutting rates, leaving the door open to future expansion of the policy. The BOJ started charging banks 0.1 percent on some of their reserves in February in an effort to get them to use their spare cash more productively and help to revive the economy and prices.

Yet central bank figures show loan growth slowed to 2 percent in June, equaling the weakest pace in three years. That’s even after banks cut the average rate on new loans to a record-low 0.678 percent in May.

Low rates “are the least favorite recipe for banks,” Tomoya Masanao, head of portfolio management for Japan at Pacific Investment Management Co., wrote in a note. “There is hope that the bank will make a very objective assessment on benefits, costs and risks of its policy and make appropriate adjustments for effectiveness and sustainability.”

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