Stock Sales Seen Aiding Japan Bank Profits as Rates Plunge

  • Japanese lenders cutting shares to boost corporate governance
  • Disposal of holdings to gain momentum: Credit Suisse’s Miura

Japan’s biggest banks are making good on their pledges to trim their stakes in client companies, a move that may help to prop up earnings being squeezed by negative interest rates.

Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. sold a combined 259 billion yen ($2.4 billion) of so-called cross-shareholdings in the year ended March, according to filings by the Tokyo-based lenders last month.

Booking profit from trimming strategic shareholdings is becoming increasingly important for the banks to counter headwinds in Japan and overseas, Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo, said by phone. Miura expects stake sales will gain momentum as the firms seek to strengthen corporate governance and make their balance sheets less vulnerable to stock-price fluctuations.

The three banks will begin reporting first-quarter earnings this week, providing the clearest evidence yet of how much the Bank of Japan’s negative-rate policy is eroding interest income. Even as Japanese stocks slump this year, the lenders are sitting on unrealized equity gains of more than 5 trillion yen, giving them an option to bolster profit as they also contend with slowing economies at home and abroad and global financial-market volatility.

MUFG Leads

MUFG, the nation’s biggest lender, disposed of 130 billion yen in shareholdings during the year ended March, its filing showed. Mizuho sold 115.7 billion yen and Sumitomo Mitsui cut its balance by 13 billion yen. Mizuho’s sales spanned a wide range of clients while MUFG mainly trimmed stakes in companies within the broader Mitsubishi group, Miura wrote in a report on July 15. The smaller reduction by Sumitomo Mitsui was predominantly from selling about a third of its holding in drugmaker Takeda Pharmaceutical Co.

Sumitomo Mitsui has made progress in its negotiations with customers, spokesman Takafumi Sasaki said by phone. The bank has received approval to sell about 60 billion yen of shares and is aiming to increase that to 150 billion yen by March, he said.

Mizuho is working toward achieving its targets, spokeswoman Masako Shiono said. MUFG will continue to negotiate with its customers to reduce the balance, spokesman Taiki Kitaura said.

For more on Japanese banks’ unwinding of cross-shareholdings, click here.

The banks made their pledges to cut cross-holdings last year as part of Prime Minister Shinzo Abe’s efforts to break down cozy relationships between shareholders and make companies more responsive to investors. Here are the key numbers:

  • MUFG plans to sell about 800 billion yen of its holdings over five years. It owned stocks with a book value of 4.9 trillion yen in March, and had unrealized gains of 2.2 trillion yen, according to presentation materials on its website. 
  • Mizuho aims to cut 550 billion yen of shares over three years. It had stocks with a book value of 1.8 trillion yen as of March, and unrealized gains of 1.6 trillion yen.
  • Sumitomo Mitsui plans to trim its holdings by about 500 billion yen over five years. It owned equities with a book value of 1.8 trillion yen in March, and unrealized gains of 1.6 trillion yen. 

Above Break-Even

Japanese stocks are trading high enough for the banks to make money from the sale of their shareholdings even after the nation’s equities tumbled this year. The Nikkei 225 Stock Average has lost 14 percent in 2016 and was at 16,400 as of 10:41 a.m. in Tokyo. Mizuho estimates that the gauge would have to approach 9,000 for it to miss out on profiting from sales.

“We can’t expect banks to expand their top lines, given the impact of negative rates,” said Miura. “But it will be possible to offset this through a reduction in bad-loan costs and sales of shareholdings,” he said, adding that he expects first-quarter results to be broadly in line with the plans of each group.

The banks are forecasting combined net income will fall 5.2 percent to 2.15 trillion yen in the year ending March 2017. Sumitomo Mitsui is scheduled to announce earnings after the market closes on July 27 and Mizuho will do so on July 29. MUFG will follow on Aug. 1. The reports will include any gains or losses from the sale of securities including equities and bonds, and the firms may provide figures on their stock disposals but won’t be obliged to do so.

Toyoki Sameshima, a Tokyo-based senior analyst at BNP Paribas SA, said a cautious stance is needed even if first-quarter figures exceed expectations.

“We would not take outperformance as grounds for optimism regarding full-year results,” Sameshima wrote in a note on July 22. “Gains on sales of equities and bonds are likely to be a swing factor for profit in the period.”

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