Japan’s three biggest banks are on pace to achieve their annual profit targets after first-quarter earnings jumped on higher fee income and equity investments.

Net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. totaled ¥791.6 billion in the three months that ended on June 30, surging 63 percent from a year earlier, according to calculations based on their earnings statements released this week. That accounts for 43 percent of the lenders’ combined ¥1.84 trillion fiscal year profit goal.

Prime Minister Shinzo Abe’s economic stimulus policies have helped Japanese stocks become the best performers among major markets this year, spurring the megabanks’ fee businesses such as investment trust sales. Lending income also picked up as demand for credit rose. Bond trading slumped as the banks sold government debt amid growing expectations for inflation.

“Megabanks are steadily making strides forward to meet full-year profit forecasts,” said BNP Paribas SA Tokyo analyst Toyoki Sameshima, who has a buy rating on all three firms. “Mutual fund sales are likely to remain strong and continue to boost fee income.”

Quarterly profit for each bank topped analysts’ average estimates. Mitsubishi UFJ’s net income climbed 40 percent from a year earlier to ¥255.3 billion, Japan’s biggest publicly traded lender said Wednesday. Mizuho, the country’s third-biggest bank by market value, said Wednesday that quarterly profit increased 35 percent to ¥248 billion. Sumitomo Mitsui, the second-largest lender, said Thursday that profit more than doubled to ¥288.3 billion.

Mitsubishi UFJ kept its full-year profit target of ¥760 billion for the year ending in March, while Sumitomo Mitsui and Mizuho kept their forecasts of ¥580 billion and ¥500 billion, respectively.

Combined fees and commissions surged 29 percent last quarter from a year earlier to ¥642.1 billion, the reports showed. The banks’ total equity-related investments gained ¥96.1 billion, compared with a ¥185.5 billion loss a year earlier. Surging stock trading volumes also boosted quarterly earnings at their brokerage arms.

The economy is showing signs of a self-sustaining recovery, the Cabinet Office said last week, raising its assessment for a third straight month. The rebound has helped city banks increase lending for seven straight months, central bank data show.

Total lending income at the megabanks climbed 11 percent last quarter to ¥1.12 trillion.

“The environment is improving for Japanese companies to expand capital spending,” Takeshi Kunibe, chairman of the Japanese Bankers Association, said July 18. “The key is how to further encourage corporate and consumer sentiment, which will need the government to execute its growth strategies,” said Kunibe, who is president of Sumitomo Mitsui’s banking unit.

There are risks to the profit outlook as investors wait to see how aggressively Abe will implement his deregulation agenda later this year. Outside Japan, China’s economic slowdown is showing signs of deepening, while the Federal Reserve may start to reduce bond purchases that have buoyed the U.S. economy.

Even as credit demand picks up, lending profitability remains weak as the Bank of Japan’s monetary easing drags down interest rates on loans. The average net interest margin at the 85 companies on the Topix Banks Index is 1.31 percent, the least in Asia, according to Bloomberg data.

“The problem is that lending margin keeps falling,” said Shinichiro Nakamura, a Tokyo-based analyst at SMBC Nikko. “Loans are increasing for large companies, mergers and acquisitions and mortgages, but profitability is low. Banks need to broaden their borrower base to small and midsize corporates.”

The firms are accelerating overseas takeovers to chase higher loan returns. Mitsubishi UFJ in July offered to buy Thailand’s Bank of Ayudhya for $5.6 billion. Sumitomo Mitsui struck a deal to buy 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion in May.

Mizuho has scope to buy a commercial bank in the U.S., Chief Executive Officer Yasuhiro Sato said in February. The bank merged its corporate and retail lending arms in July.

Bond trading is no longer a driver of profit growth at the banks, which are paring holdings, Wednesday’s reports showed. Combined bond and securities trading income fell 43 percent to ¥265.6 billion in the first quarter.

Sumitomo Mitsui’s lending unit almost halved its Japanese government bond holdings to ¥11.5 trillion in the three months through June, according to the company’s earnings presentation. Mitsubishi UFJ pared its holdings by 17 percent over the quarter to ¥40.3 trillion and Mizuho reduced the amount by 20 percent to ¥24.6 trillion.

“Megabanks started adjusting their balance sheets on the premise that credit demand will increase,” said BNP Paribas’ Sameshima. “They’re trimming JGB holdings to get cash that they can use for lending.”

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