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Banks’ record earnings mask actual profit prospects

Bloomberg

The nation’s biggest banks, poised to achieve record annual earnings after last year’s stock market surge, may still disappoint investors as the equity rally fades, leaving them reliant on a lending recovery for profit.

Net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. totaled ¥2.1 trillion in the nine months that ended in December, company statements show.

That represents 91 percent of their combined target of ¥2.26 trillion for the year ending March 31, which would be the most since the three mega-bank regime started with the creation of Mitsubishi UFJ in 2005.

Prime Minister Shinzo Abe’s campaign to end deflation, which drove an equity revival in 2013 that boosted the value of banks’ shareholdings, has been slow to fuel credit growth to make up for low interest rates.

“It’s certain that the mega-banks will achieve their full-year targets,” said Toyoki Sameshima, an analyst at BNP Paribas SA. “To halt the decline in loan margins, the market is expecting banks to increase lending volume, which requires demand from smaller companies.”

Investors who flocked to Japanese stocks last year are now selling as part of a global retreat amid signs of a slowdown in China and cuts to the Federal Reserve’s stimulus. The yen, down 18 percent against the dollar in 2013, has strengthened 4 percent this year, potentially curbing exporters’ profits.

Net income at Mitsubishi UFJ, Japan’s biggest bank, climbed 48 percent to ¥785.4 billion in the nine months that ended Dec. 31, the lender said Monday, maintaining its full-year profit target at ¥910 billion.

Sumitomo Mitsui’s nine-month profit gained 28 percent to ¥704.7 billion, the country’s second-largest lender by market value reported last week, leaving its full-year forecast at ¥750 billion. Mizuho kept its projection at ¥600 billion after nine-month net income rose 44 percent to ¥563.1 billion.

Analysts are more bullish, expecting the banks’ profits to exceed their targets. Combined annual income will total ¥2.37 trillion, topping the ¥2.26 trillion forecast by the lenders, according to the average of analysts’ estimates compiled by Bloomberg.

Valuation gains from shareholdings of the three banks totaled ¥203.4 billion in the nine months through Dec. 31, compared with ¥265.7 billion in losses a year ago, the earnings statements show. The lenders own shares as part of a tradition of Japanese companies taking stakes in each other.