Japan's Banks Still Suffer a Year After BOJ Salvages Yield Curve

  • Loan margins falling even as lending grows most in eight years
  • Share slump has driven price-to-book ratios toward 0.5

A year after the Bank of Japan threw a lifeline to Japanese banks by targeting bond yields, lenders are still taking cold comfort from the move.

Last September’s shift arrested a slide in yields and reduced the risk that the central bank may take benchmark interest rates deeper below zero, abating fears that banks’ interest income will tumble. But borrowing costs remain close to record-low levels, making it tough for lenders to profit from the difference between deposit and loan rates.

Read this QuickTake Q&A on the BOJ’s yield curve control policy

Here are five charts that illustrate banks’ plight:

1. Interest Margins

The difference between the rates banks pay their depositors and what they earn from lending has continued to slide, further sapping the profitability of doling out credit. Lending rates are still falling, while those on deposits have already reached virtually zero, squeezing net interest margins.

2. Loan Growth

One bright sign is that bank lending is picking up. Loans expanded 3.4 percent in July from a year earlier, the fastest rate since April 2009, as cheap credit made borrowing a more attractive proposition for consumers and businesses.

3. Lending Income

But even faster loan growth hasn’t been enough to overcome the drop in lending profitability. Net interest income at Japan’s three largest banks -- Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. -- has fallen in each of the past three fiscal years.

4. Corporate Value

Shareholders have punished Japanese banks for their weakened profitability, driving down their price-to-book ratios -- a measure of how investors value a firm’s assets. The three megabanks’ stock prices have fallen between 6 percent and 10 percent this year.

5. Profit Targets

MUFG and Sumitomo Mitsui are at least on course to achieve their annual net income targets, while Mizuho lags behind after a weak first quarter. Mizuho and Sumitomo Mitsui set conservative goals, forecasting profit will fall from the previous year. MUFG was the only megabank to project an increase.

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