Japan’s Banks Seen Posting Profit Gains That Won’t Last

When Japan’s three biggest banks report a jump in profit this week, investors should be warned: the gains are already disappearing with the drop in the stock market.

Combined net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. probably rose 9.5 percent to 2.42 trillion yen ($23.8 billion) for the year ended in March, the highest since 2006’s record earnings, according to analyst estimates compiled by Bloomberg. That’s expected to drop 12 percent to 2.13 trillion yen in the year ending next March, estimates show.

An equity rally that boosted the value of the banks’ stock holdings and spurred sales of mutual funds has stalled, with the Nikkei 225 Stock Average dropping 13 percent since ending 2013 at a six-year high. Loans are rising amid an economic recovery driven by Prime Minister Shinzo Abe’s policies of fiscal spending and monetary easing.

“Banks’ earnings are getting back to normal as they lose gains from equities that outperformed last year,” Yoshinobu Yamada, a Tokyo-based analyst at Deutsche Bank AG, said by phone on May 7. “Abenomics remains positive for lenders as loans are steadily increasing.”

Net income at Mitsubishi UFJ, Japan’s biggest bank, will drop 6 percent to 896.6 billion yen in the year that started April 1 from 953.4 billion yen, according to the average estimates of analysts surveyed by Bloomberg. Profit at Sumitomo Mitsui will fall 15 percent to 685 billion yen, while Mizuho’s will slip 16 percent to 552.2 billion yen, the projections show.

Waning Enthusiasm

The so-called megabanks are scheduled to report earnings for last fiscal year on May 14, along with forecasts for the current period.

Investors flocked to Japanese stocks in 2013 as Abe’s efforts to revive the economy and spark inflation weakened the yen, boosting the value of exporters’ repatriated earnings. The absence of fresh monetary easing, a sales-tax increase and skepticism about the pace of promised business deregulation damped enthusiasm for the country’s equities this year.

The Nikkei 225 fell 0.4 percent at the close of trading in Tokyo today. Mitsubishi UFJ increased 0.4 percent, paring this year’s decline to 19 percent. Sumitomo Mitsui, the country’s second-biggest bank by market value, gained 0.4 percent and has retreated 24 percent in 2014. Mizuho fell 1 percent and is down 13 percent since December.

Valuation gains from the three banks’ shareholdings totaled 203.4 billion yen in the nine months through Dec. 31, compared with 265.7 billion yen in losses a year earlier, according to their most recent filings. The lenders own shares as part of a tradition of Japanese companies taking stakes in each other.

Deflation Goal

Even as equities slump, Abe remains on target to achieve his goal of ending deflation, Nobuyuki Hirano, chairman of the Japanese Bankers Association, said in an interview in March. Hirano, also president of Mitsubishi UFJ, said the world’s third-largest economy will probably withstand the consumption-tax increase that took effect last month and loan demand will continue to pick up.

Gross domestic product will resume expanding in the three months ending September following a 3.3 percent contraction in the current quarter, according to the median estimate of economists. The sales levy was increased 3 percentage points to 8 percent on April 1.

Loans at major banks climbed for a 17th month in April, according to Bank of Japan data released today. Sentiment among large manufacturers rose to the highest level since 2007, the most recent quarterly central bank survey showed in April.

Credit Demand

“Credit demand is rising from various sectors,” Hirano said. “I expect the trend of lending growth will be sustained through this fiscal year.”

Mizuho’s main banking unit chief earlier this month pledged to take more risks to increase lending to small businesses, which employ about two-thirds of Japan’s workers.

“To boost Japan’s vitality, we need to secure an environment that allows small and medium-sized enterprises to expand without worries,” Nobuhide Hayashi, who became president of Mizuho Bank Ltd. on April 1, said in an interview.

Lending profits are constrained by interest rates kept low by a Bank of Japan program, unveiled in April 2013, of buying about 7 trillion yen of bonds a month. Net interest margins for the 87 lenders on the Topix Banks Index average 1.28 percent, the least in Asia, according to data compiled by Bloomberg.

“It may still take some more time until short-term interest rates increase,” said Deutsche Bank’s Yamada. “A turnaround of those rates can give a huge boost to banks’ earnings in the future.”

Expanding Abroad

Weak loan profitability has prompted megabanks to look abroad for higher yields. Mitsubishi UFJ is considering a bid for Bank of New York Mellon Corp.’s corporate trust arm, people with knowledge of the matter said last week. The unit could fetch at least $2.5 billion, a person familiar with the situation said last month.

Mitsubishi UFJ purchased Thai lender Bank of Ayudhya Pcl for about $5 billion in December, its biggest acquisition in Asia outside of Japan, and Sumitomo Mitsui agreed to buy 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion last May.

“We’d like to know how much these takeovers will add to profits,” said Ryoji Yoshizawa, a Tokyo-based director of financial institution ratings at Standard & Poor’s. “There is more credit demand overseas, especially in Asia. If there is still any chance for Japanese banks to pursue investments and acquisitions there, they’ll go for it.”

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