Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Even as they beat forecasts, second-quarter earnings at Japan's top banks were grim. But with Donald Trump set for the White House and Japan's economy chalking up surprisingly strong expansion last quarter, things are looking up for the embattled lenders.

The nation's three megabanks all posted results Monday that showed negative interest rates eating into income and a rising yen denting overseas earnings. 

Mitsubishi UFJ Financial Group Inc. reported net income of 301.6 billion yen ($2.78 billion) for the three months to Sept. 30, beating analyst estimates, but left full-year forecasts unchanged as first-half gross profit fell on lower net interest income. Mizuho Financial Group Inc.'s profit was little changed at 225.6 billion yen, again exceeding analyst projections, although helped by a one-time tax gain from the liquidation of an overseas brokerage unit.

Sumitomo Mitsui Financial Group Inc. cut its pretax profit target, citing the rising yen. Earnings rose 46 percent to 174.9 billion yen, the jump thanks in large part to a writedown a year earlier, and the lender trimmed its full-year ordinary-profit forecast by 60 billion yen.

Those somewhat lackluster numbers might be enough to make investors want to write off the Tokyo-based trio.

Over the past 12 months, their shares have been under pressure, roiled further after June's Brexit vote, which raised concern about the cost of shifting business within Europe. Not even the Bank of Japan's Sept. 21 pledge of yield-curve control , or keeping 10-year bond yields at zero, cheered shareholders.

The spike in megabanks' stocks last week after Trump swept to power shows that view may be premature, in part because of the lenders' growing exposure to the U.S. The president-elect has promised to lighten financial regulation and lower corporate tax rates. Most U.S. financial institutions have rallied and that sentiment has spread across the globe.

Victory Rally
Shares in Japan's megabanks have been hit since the introduction of negative interest rates and Brexit but jumped after Trump won the U.S. election
Source: Bloomberg

Mitsubishi UFJ is the most exposed to America, with a 23 percent stake in Morgan Stanley and a retail bank on the west coast. As of the end of fiscal 2015, the three had outstanding advances of more than $176 billion in the U.S.

Trump's inflation push is also good news for Japanese lenders -- which specialize in the kind of long-term infrastructure loans and project finance many international rivals have shied away from in recent years -- as is the recent surge in Treasury yields.

Securities Shift
Mitsubishi UFJ has more Japanese government bonds but the balance is shifting
Source: Company filings

Fund managers at the trio all see an opportunity to buy, with the yield premium on 10-year Treasuries over similar Japanese government notes the widest since January 2014. Even after currency hedging, the U.S. debentures offer the highest yields since June. Mitsubishi UFJ said Monday it had 24.8 trillion yen in foreign bonds, versus 24.4 trillion yen in Japanese government debt.

Glimmers of hope from an improving home economy are always a bonus for financial institutions, too. Combined with the Trump effect, Japan's banks may get their verve back sooner rather than later.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Yield-curve control should increase profitability for banks, which depend on a wider spread in rates in order to arbitrage profits.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net