Japan Banks to Hit Profit Goals as Stimulus Curtails Bad Loans

(Bloomberg) -- Japan’s three biggest banks are likely to stay on course toward achieving their annual profit goals as bad-loan costs remain in check, analysts said ahead of fiscal second-quarter results due this week.

Massive government and central bank aid has spurred lending and kept companies afloat during the pandemic-fueled recession, reducing the need to ramp up provisions. Investment banking has been picking up, helping to alleviate the impact of rock-bottom interest rates that are squeezing lending profitability at home and abroad.

“I expect their second-quarter results won’t be bad,” said Toyoki Sameshima, an analyst at SBI Securities Co. Thanks to the stimulus measures, “the emergence of bad-loan costs is being pushed down the road, and could even be delayed into the next fiscal year,” he said.

Since the coronavirus emerged, the Bank of Japan introduced lending facilities for small businesses to cope with the crisis, while the government expanded loan guarantee and interest subsidy programs. That fueled a record rush to obtain cheap loans.

Any moderation of bad-loan charges would mirror a trend seen around the world this earnings season, after banks from Singapore to the U.S. kept defaults at bay. Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. Mizuho Financial Group Inc. are expecting credit costs -- which include provisions as well as actual losses on soured loans -- to almost double to 1.1 trillion yen ($10.5 billion) in the year ending March, the highest combined amount in 11 years.

Bankruptcies fell 9.4% in the six months through September to 3,858 cases, the fewest since 1990, according to Tokyo Shoko Research. Still, there is a risk that more businesses will fail once virus-related support measures expire.

“It’s too early for domestic credit costs to materialize,” said Rie Nishihara, an analyst at JPMorgan Chase & Co.

Mizuho’s credit costs are likely to be lower than MUFG’s and Sumitomo Mitsui’s because of its smaller overseas exposure, according to Bloomberg Intelligence analysts Shin Tamura and Francis Chan.

Mizuho is set to post earnings for the three months ended Sept. 30 on Thursday, followed by larger rivals MUFG and Sumitomo Mitsui on Friday.

The banking groups were also helped last quarter by a strong performance at their brokerage arms. Each of their securities units reported sharp year-on-year profit growth, thanks to a pickup in activity by corporate and retail customers.

Another likely bright spot is profits from unloading stocks and bonds. Nishihara said the banks’ selling of strategic equity holdings probably picked up last quarter, as Japanese stocks advanced. MUFG and Sumitomo Mitsui probably booked large gains on sales of bonds in their investment portfolios, Tamura and Chan wrote.

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