Japan’s biggest banks have warned investors of a tough year ahead.
The nation’s three mega-banks have been relying on the healthy status of borrowers and sales of so-called cross-shareholdings for earnings as rock-bottom interest rates crimp lending profitability. Results on Wednesday showed they are losing those benefits at a time when the economy is weakening, trade tensions are escalating and the Bank of Japan’s extraordinary monetary easing looks set to stay.
“The business environment is very uncertain and tougher than last year,” Sumitomo Mitsui Financial Group Inc. President Jun Ohta said at a news briefing in Tokyo on Wednesday, dismissing the notion that his bank’s profit target is conservative.
Sumitomo Mitsui, Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. all posted net income projections that missed analysts’ estimates, as rising bad-loan costs and diminishing gains from sales of stock holdings put a dampener on earnings prospects in the year ending March 2020.
While both Mizuho and MUFG are expecting profit to increase this year, to ¥470 billion ($4.3 billion) and ¥900 billion respectively, that’s only after they booked large writedowns that hurt results in the previous period. Sumitomo Mitsui sees net income slipping about 4 percent to ¥700 billion.
“Signs of an economic slowdown have been emerging in Japan and overseas,” Mizuho Chief Executive Officer Tatsufumi Sakai told reporters. The bank is seeking to cut a further 30 branches in the next five years, on top of 100 reductions previously targeted.
Sakai said Mizuho’s profit target reflects a likely decline in gains from stock selling and an uptick in credit costs that were “very low” last year.
The banks have been paring their stakes in corporate clients in response to Prime Minister Shinzo Abe’s efforts to urge firms to improve governance. A stock market rally since Abe took office in 2012 has helped them book gains from the sales.
Sumitomo Mitsui, the only one of the three bank stocks to rise this year, said it plans to buy back as much as ¥100 billion of shares. Its shares slipped 0.2 percent at 9:23 a.m. in Tokyo after climbing as much as 0.7 percent. MUFG slid 2.7 percent and Mizuho lost 1.1 percent.
The lenders trade at half the book value of their assets or less, and Bloomberg Intelligence sees little chance of improvement.
The banks are replenishing loan provisions that they had drawn down and booked as profits in recent years amid a dearth of corporate bankruptcies. But Sumitomo Mitsui’s Ohta and MUFG CEO Kanetsugu Mike were quick to say that the increase in bad-loan expenses doesn’t mean they expect a wave of defaults.
“We don’t have room for more provision clawbacks,” Ohta said. “Given the uncertain environment, we expect a normalization of credit costs.”