Japanese Banks’ Record Earnings Mask Profit-Growth Prospects

Japan’s biggest banks, poised to achieve record annual earnings after last year’s stock-market surge, may still disappoint investors as the equity rally fades, leaving them reliant on a lending recovery for profit.

Net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. totaled 2.1 trillion yen ($21 billion) in the nine months ended December, company statements show. That’s 91 percent of their combined target of 2.26 trillion yen for the year ending March, which would be the most since the three-megabank regime started with the creation of Mitsubishi UFJ in 2005.

Prime Minister Shinzo Abe’s campaign to end deflation, which drove an equity revival in 2013 that boosted the value of banks’ shareholdings, has been slow to fuel credit growth to make up for low interest rates. Bank shares fell today and the Nikkei 225 Stock Average tumbled the most since June after entering a correction yesterday amid a global selloff.

“It’s certain that the megabanks will achieve their full-year targets,” said Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA. “To halt the decline in loan margins, the market is expecting banks to increase lending volume, which requires demand from smaller companies.”

Investors who flocked to Japanese stocks last year are now selling on concern that economic growth will slow at home and abroad. The yen, which weakened 18 percent against the dollar in 2013, has strengthened about 4 percent this year, potentially curbing exporters’ profits.

Nikkei Slide

The Nikkei 225 closed 4.2 percent lower in Tokyo, extending losses this year to 14 percent. The gauge jumped 57 percent to a six-year high last year. Mitsubishi UFJ fell 3.8 percent today, the most since August, and slumped 16 percent in 2014. Sumitomo Mitsui lost 3 percent today and Mizuho slid 3.8 percent.

Net income at Mitsubishi UFJ, Japan’s biggest bank, climbed 48 percent to 785.4 billion yen in the nine months ended Dec. 31, the lender said yesterday, maintaining its full-year profit target at 910 billion yen.

Sumitomo Mitsui’s nine-month profit gained 28 percent to 704.7 billion yen, the country’s second-largest lender by market value reported last week, leaving its full-year forecast at 750 billion yen. Mizuho kept its projection at 600 billion yen after nine-month net income rose 44 percent to 563.1 billion yen.

Analysts Bullish

Analysts are more bullish, expecting the Tokyo-based banks’ profits to exceed their targets. Combined annual income will total 2.37 trillion yen, topping the 2.26 trillion-yen forecast by the lenders, according to the average of analysts’ estimates compiled by Bloomberg.

Valuation gains from shareholdings of the three banks totaled 203.4 billion yen in the nine months through Dec. 31, compared with 265.7 billion yen in losses a year ago, the earnings statements show. The lenders own shares as part of a tradition of Japanese companies taking stakes in each other.

Third-quarter results all exceeded analysts’ estimates. Mitsubishi UFJ’s net income unexpectedly rose 5.5 percent to 255.2 billion yen, as higher lending profit and fees made up for a decline in bond trading, figures derived from yesterday’s nine-month earnings statement showed.

Net income at Sumitomo Mitsui slipped 9.3 percent to 199 billion yen in the three months, and Mizuho’s decreased 36 percent to 133.4 billion, owing to the slump in bond trading. Analysts predicted sharper profit drops.

Bond Shift

“Gains in equities made up for declines in bond income, which was the other way round during the previous fiscal year,” said Yoshinobu Yamada, a Tokyo-based analyst at Deutsche Bank AG. “Banks have already exceeded 90 percent of their full-year estimates and I think they’ll beat the targets.”

The lenders are moving cash out of government bonds and increasing loans as the central bank buys sovereign debt to stoke inflation and stimulate the world’s third-largest economy. At the same time, Bank of Japan Governor Haruhiko Kuroda’s monetary easing is keeping interest rates low, constraining lending profitability.

Net interest income, or revenue from lending minus payments on deposits, at the three biggest banks climbed 6.4 percent to 3.4 trillion yen in the nine months ended December, the earnings reports show.

Loans at major banks climbed for a 13th month in December, according to Bank of Japan data. The average net interest margin for the 87 lenders on the Topix Banks Index is 1.3 percent, the least in Asia, data compiled by Bloomberg show.

“We expect to see evidence emerge from next quarter that an increase in lending volume can cover the narrowing loan margins,” said Shinichi Ina, an analyst at UBS AG in Tokyo. “Demand for funds has been increasing from big companies. It may take another half year to see demand from smaller companies rising.”

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