Business / Corporate

Japanese banks face headwinds even with current profit goals in sight

Bloomberg, JIJI

Even as the nation’s biggest banks remain on course to achieve their full-year earnings goals, they are losing profit drivers.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. all posted declines in fiscal second-quarter net income, as they struggled to make money from their core business of lending.

“The economic outlook remains uncertain for the second half,” said MUFG CEO Kanetsugu Mike at a briefing on the results. “The environment for the financial industry remains tough.”

Mitsubishi UFJ’s net profit dropped 6.3 percent, to ¥609.9 billion, and Sumitomo Mitsui Financial’s net profit fell 8.6 percent, to ¥431.9 billion. Mizuho reported a net profit of ¥287.6 billion, down 19.9 percent.

The earnings environment remains largely uncertain, said Tatsufumi Sakai, president and group chief executive officer at Mizuho Financial Group Inc., at a news conference.

A further interest rate cut of 0.1 percentage point by the central bank could “push down revenue and profits by some ¥30 billion annually,” Sakai noted.

Earnings at the three banks have recently been driven by gains on sales of stocks and bonds, which have made up for the slump in lending. But there’s no guarantee that they can keep relying on those transactions, putting pressure on the lenders to accelerate cost cuts as shrinking interest rates squeeze them at home and abroad.

When you look beyond the bottom line, “it’s not terrible” but there are “not very many exciting parts,” said Michael Makdad, a Morningstar Inc. analyst in Tokyo.

Results for the first half were “almost all driven by gains on sales of bonds after U.S. interest rates declined,” Makdad added. Now that the Federal Reserve appears to have paused on rate cuts, it may be tougher to book such gains going forward.

Credit costs are rising as the banks replenish reserves after drawing down excess provisions the previous year. While that doesn’t necessarily portend a flood of bad loans, it’s one less profit driver.

The banks have been expanding abroad over the past decade in search of higher returns. Yet with interest rates dropping worldwide, net interest margins even in regions like Southeast Asia are being squeezed. Rather than overseas expansion, a better profit driver “would be expense cuts in Japan,” said Makdad said.