Sumitomo Mitsui Profit Falls as Negative Rates Hurt Lending

  • Japan banks face interest income headwinds: Citigroup’s Kogi
  • BOJ may expand stimulus as Abe’s government prepares package

Sumitomo Mitsui Financial Group Inc.’s first-quarter profit fell 31 percent as negative interest rates eroded lending income, overshadowing a rebound in trading.

Net income slid to 184.3 billion yen ($1.7 billion) in the three months ended June 30 from 267.9 billion yen a year earlier, Japan’s second-biggest lender by market value said in a statement Wednesday. That compared with the 172.8 billion yen average estimate of five analysts surveyed by Bloomberg.

Profit at Japan’s banks has come under pressure since the Bank of Japan’s negative-rate policy squeezed margins, and some economists are predicting that the BOJ will take rates further below zero later this week to fight deflation. The government is also preparing economic stimulus, with Kyodo News reporting Wednesday that Prime Minister Shinzo Abe is planning a package of more than 28 trillion yen.

“We find it hard to envision significant upside to profit levels in this current bleak operating environment,” Kentaro Kogi, a Tokyo-based analyst at Citigroup Inc., wrote in a note before the results. “Core earnings are weak due to net interest income headwinds in Japan and overseas.”

Lending Crunch

Here are key figures from the results:

  • Lending profit decreased 25 percent to 326.5 billion yen.
  • Fees and commissions fell 8 percent to 219.3 billion yen.
  • Bond and securities trading profit rose 45 percent to 102.7 billion yen.
  • Gains on stock holdings slumped 96 percent to 1.5 billion yen.
  • Credit-related costs increased 4.1 billion yen to 10.6 billion yen.

Tokyo-based Sumitomo Mitsui left its full-year net income forecast unchanged at 700 billion yen. First-quarter profit represents 26 percent progress toward the target.

Fees and commissions have been lackluster as volatile stock markets dissuade consumers from purchasing investment products. Daiwa Securities Group Inc., Japan’s second-biggest securities firm, said Wednesday that first-quarter profit fell 45 percent to 24.6 billion yen, led by a drop in brokerage commissions.

Worst Industry

Shares of Sumitomo Mitsui closed 0.8 percent higher in Tokyo before the results, paring this year’s decline to 32 percent. The Topix Banks Index has fallen 33 percent in 2016, the most among the 33 industry groups on the benchmark Topix, which has slid 15 percent.

Japan’s other two biggest lenders are also likely to post lower first-quarter profit, according to the average estimate of analysts surveyed by Bloomberg. Mizuho Financial Group Inc. is scheduled to report results on Friday. Mitsubishi UFJ Financial Group Inc., the nation’s largest bank, will do so on Monday.

For a QuickTake explainer on negative rates, click here.

The Bank of Japan started charging banks 0.1 percent on some of their deposits held at the institution in February, in part to prompt them to lend more. So far that hasn’t happened, with central bank figures showing 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 0.678 percent in May.

Japanese Bankers Association Chairman Takeshi Kunibe, who is also chief executive officer of Sumitomo Mitsui’s lending unit, said in June that expanding negative rates would have a severe impact on the industry.

BOJ Governor Haruhiko Kuroda and his board will boost monetary stimulus at their meeting ending Friday, according to most economists surveyed by Bloomberg. An increase in purchases of exchange-traded funds is the most likely area, followed by a deeper cut in negative rates, the survey showed.

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