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Bloomberg
Making money from lending remains a tough task for Japan’s biggest banks.
Profit at Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. probably fell about 20 percent last quarter as negative interest rates pressured loan income at home and the stronger yen dented earnings abroad, according to analysts surveyed before results due Monday. Sumitomo Mitsui Financial Group Inc.’s net income is estimated to have risen 31 percent after it booked a writedown on its stake in an Indonesian lender a year earlier.
Earnings prospects dimmed this year after the central bank began charging lenders for some of their reserves to spur credit growth and end decades of deflation. While Governor Haruhiko Kuroda and his board modified the policy in September, refraining from taking short-term rates further negative and instead seeking to control the yield curve, analysts including Takashi Miura at Credit Suisse Group AG expect pressure on interest income to persist.
“The effects of negative rates on megabank profit are quickly visible because they have a large volume of spread lending to major corporations and the duration on their domestic bond portfolios is short,†Miura said. The yen’s 13 percent rise against the dollar this year has had a significant impact on repatriated earnings from overseas, he said.
Net income at MUFG fell to 245.6 billion yen ($2.3 billion) in the three months ended September, according to the average estimate of seven analysts surveyed by Bloomberg. Mizuho’s earnings slipped to 182.2 billion yen and Sumitomo Mitsui’s rose to 157.8 billion yen, the projections showed.
Rock Bottom
With deposit rates already virtually at zero, falling lending rates eat directly into the margin banks can earn from doling out cash to companies and households. The average interest rate on new loans slid to a near-record low of 0.703 percent in August, according to the Bank of Japan.
Following a policy review in September, BOJ Governor Kuroda pledged to keep 10-year government bond yields around zero, a move that may give lenders some room to protect their razor-thin margins. Net interest income at the three largest banks dropped in each of the four quarters to June.
“There are three heavy weights hanging over the banks: lower domestic earnings due to negative interest rates; the high yen and slowing Asian economies hitting overseas profit; and the increase in foreign-currency funding costs,†said Toyoki Sameshima, a senior analyst at BNP Paribas SA in Tokyo.
Trump Bounce
Not all is bleak for the lenders. Bank shares, this year’s worst performers in Japan until last week, rebounded after Donald Trump’s surprise election victory spurred speculation that his administration would ease financial regulations and implement fiscal policies that drive U.S. bond yields higher. MUFG stands to benefit the most, according to Credit Suisse’s Miura, since it has a retail bank on the West Coast and owns 23 percent of Morgan Stanley.
At the same time, Miura expects MUFG to be hit the most by the yen’s appreciation because Japan’s biggest bank has a large exposure to foreign currency. He estimates this could have shaved 5 percent from last quarter’s profit.
If the three banks meet analysts’ projections for the second quarter, they will be on course to achieve their own full-year profit targets. MUFG is expecting net income of 850 billion yen for the year ending March, Sumitomo Mitsui 700 billion yen and Mizuho 600 billion yen.
“It was a tough environment for the banking industry in the first half,†Takeshi Kunibe, chairman of the Japanese Bankers Association, said last month. “There’s a risk that negative impacts on bank profits may continue†if loan spreads continue to tighten, he said.