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JAPAN’S three biggest banks forecast record income in the coming year on Wednesday (May 15), signalling increased optimism about an economy that has only just exited from years of negative interest rates.
The results from Mitsubishi UFJ Financial Group (MUFJ), Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG) also show how Japanese banks are benefiting from higher interest rates in overseas markets, such as the United States, as well as a weaker yen, which inflates profits when earnings from abroad are brought home.
For years, Japan’s big banks have been squeezed by the central bank’s massive monetary stimulus, including negative interest rates. The Bank of Japan (BOJ) in March raised interest rates for the first time in more than a decade and a half, heightening expectations that banks will be able to make more money from lending.
“We are entering a world with interest rates, which is a plus for us,” MUFJ’s group chief executive, Hironori Kamezawa, told reporters.
For the current year, MUFJ expects a net profit of 1.5 trillion yen (S$12.9 billion), a slight increase over the year just ended which saw profit jump by a third to a record.
He said the full-year results, which the banks focus on rather than quarterly numbers, were “extremely strong”.
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Likewise, second-ranked SMFG forecast a record full-year net profit of 1.06 trillion yen – the first time it will exceed the one trillion yen mark – and third-ranked Mizuho a record 750 billion yen. Both of those forecasts represent a 10 per cent increase on the year just ended.
Big question
The question now is how much banks can benefit from improving demand for deals and higher interest rates to come at home.
One telltale sign may be in the mindset of Japanese businesses and households, where years of deflation forced people and companies to hoard cash.
“We are extremely positive on the Japanese economy,” SMFG CEO Toru Nakashima told reporters.
“The mindset of Japanese corporate managers is much more optimistic than in the past,” he said, though he added that economic benefits have yet to trickle down to the average citizen.
Investors, for one, appear optimistic on the outlook for banks. The Tokyo market’s index of bank stocks is up 61 per cent over the last year, far outstripping the Topix index, the broadest measure of Tokyo stock performance, which has gained 29 per cent.
Both MUFJ and SMFG said they would each spend up to 100 billion yen buying back and cancelling shares. SMFG said it would also carry out a 3-for-1 stock split for shareholders as of Sep 30. Mizuho chief executive Masahiro Kihara said the bank would not do a share buyback until it built up sufficient capital reserves for investing in its growth strategy.
For the fourth quarter, MUFJ reported a 75 per cent decline in net profit to 193 billion yen, compared with 773.3 billion yen in the same period a year earlier when profits surged due to the sale of a subsidiary. Full-year forecasts of 13 analysts polled by LSEG implied a 147-billion-yen quarterly profit, from the same period a year ago
SMFG’s profit grew more than four times to 170 billion yen, compared with the 150 billion yen implied by the LSEG consensus estimate for the full year. Earnings were helped by strong loan demand, driven by a pickup in corporate client activity.
Mizuho, meanwhile, reported net profit tripled to 36.7 billion yen, compared with 12.3 billion yen in the same period a year earlier, helped by its overseas business and demand for loans at home. That number too came in ahead of estimates of a 30.8-billion-yen-quarterly profit, based on the average full-year estimate by 11 analysts polled by LSEG..
The banks are benefiting from an earnings boost following BOJ’s shift in March. Big banks, including the three, have about 200 trillion yen at the central bank reserve and with the annual 0.1 per cent interest on the amount beyond the minimum requirement, they earn about 200 billion yen.
The end of the BOJ’s negative rates policy raised SMFG’s net interest income by 40 billion yen, and it will gain another 40 billion yen for each increase of 10 basis points in the policy rate. Mizuho said the end of negative rates added 45 billion yen to its profit. BLOOMBERG, REUTERS
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