Banks in Japan are facing sharply higher costs for bad loans due to the novel coronavirus pandemic, but the damage is unlikely to show through in first-quarter earnings reports.
The three largest lenders have already forecast credit costs swelling to an 11-year high of $10 billion in the year ending March 2021. Yet analysts predict actual expenses booked in the April to June quarter were relatively low, because companies have been tapping credit lines and Bank of Japan loan assistance that will give them room to ride out the storm, at least for now.
“Corporate borrowers have secured cash and they won’t go bust as long as they have it,” said Toyoki Sameshima, an analyst at SBI Securities Co.
Bloomberg Intelligence analyst Shin Tamura echoed that line, saying credit deterioration at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. may take time, thanks in part to government support. The Abe administration has unveiled ¥234 trillion ($2.2 trillion) in virus-related stimulus packages, while the Bank of Japan has introduced business lending programs worth as much as ¥90 trillion.
Such aid has helped to keep bankruptcies and joblessness low in the nation, even after a state of emergency caused economic activity to plummet last quarter. But it remains to be seen how long the banks can hold off joining global peers in making large provisions. Wall Street’s biggest lenders set aside $35 billion last quarter alone.
“We expect bankruptcies to mirror the broader economic trajectory in the long term, and there is a risk of a sharp increase as government relief programs fade,” wrote Fitch Ratings Inc. analyst Kaori Nishizawa. That will hurt asset quality, pushing up credit costs through higher loan-loss provisioning, as well as eroding capital buffers, she said.
The lenders also face the persistent headwind of rock-bottom interest rates, thanks to central bank monetary easing that has no end in sight. The rate on new loans in Japan tumbled to an unprecedented 0.448 percent in May, BOJ figures show.
“Net interest income should continue to decline, with narrowing margins both in Japan and overseas,” Tamura said of Sumitomo Mitsui, which is set to report first, on Wednesday.
Mizuho is scheduled to post its results Friday, followed by MUFG on Aug. 4.