Japan Megabanks See Challenging Year as Profit Drivers Wane

(Bloomberg) -- Japan’s biggest banks have warned investors of a tough year ahead.

The nation’s three megabanks 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.

Japan Megabanks See Challenging Year as Profit Drivers Wane

“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, 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.

Japan Megabanks See Challenging Year as Profit Drivers Wane

While both Mizuho and MUFG are expecting profit to increase this year, to 470 billion yen ($4.3 billion) and 900 billion yen respectively, that’s only after they booked large writedowns that hurt results in the previous period. Sumitomo Mitsui sees net income slipping about 4% to 700 billion yen.

Shares of Mizuho and MUFG fell at the open in Tokyo on Thursday, while Sumitomo Mitsui was little changed after announcing a stock buyback.

Japan Megabanks See Challenging Year as Profit Drivers Wane

“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.

Japan Megabanks See Challenging Year as Profit Drivers Wane

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 yen of shares. Its shares slipped 0.2% at 9:23 a.m. in Tokyo after climbing as much as 0.7%. MUFG slid 2.7% and Mizuho lost 1.1%; both are heading for the lowest close since 2016.

The lenders trade at half the book value of their assets or less, and Bloomberg Intelligence sees little chance of improvement.

What Bloomberg Intelligence Says

MUFG, SMFG and Mizuho’s price-to-book values may continue to struggle in 2019, barring consistent profit growth. Only a complete turnaround in the BOJ’s easing policy could rejuvenate the megabanks’ loan spreads and profit growth, in our view.
--Francis Chan, Asia banks analyst
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Japan Megabanks See Challenging Year as Profit Drivers Wane

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.”

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