Japan Banks Fall as Coronavirus Reality Sinks In With Investors

(Bloomberg) --

Japanese bank investors are bracing for more pain as the coronavirus worsens the profit outlook on almost every front.

Shares of lenders including Mitsubishi UFJ Financial Group Inc. led declines in Tokyo trading on Wednesday after the Federal Reserve’s emergency rate cut made it more difficult to generate interest income abroad. With benchmark rates at home below zero, Japan’s major banks are increasingly relying on loans overseas for much of their lending profit, and even smaller lenders have been accumulating U.S. Treasuries -- whose yields dipped below 1% for the first time this week -- for higher returns.

The coronavirus is having a direct impact at home also, where it is projected to send the economy into a recession. With people avoiding crowded spaces, declines in branch traffic will make it harder to sell investment products to individuals. Fee income is under pressure as corporate clients shun meetings with bankers on deals. And the strain on corporate borrowers most hurt by the outbreak, such as retailers and restaurants, may prompt banks to add provisions for bad loans.

“The market seem to be starting to price in the impact that the outbreak could have on banks’ earnings,” said Hideyasu Ban, an analyst at Jefferies in Tokyo. “The concern is that the coronavirus could undermine efforts being made to cushion declines in interest income.”

The Topix Banks Index closed 2.2% lower in Tokyo on Wednesday, the worst-performing industry group. MUFG, Japan’s biggest bank, and Sumitomo Mitsui Financial Group Inc. decreased more than 2%, while Mizuho Financial Group Inc. slid 1.9%. The three lenders are all down at least 14% this year, slightly more than the benchmark Topix’s 13% decline.

Declining U.S. interest rates aren’t all bad for Japanese banks. Because the drop in Treasury yields increases the value of their holdings of the securities, they can book gains on sales. But any new purchases would carry lower coupons, reducing returns.

Banks’ shares could fall further should the Bank of Japan follow the Fed and undertake additional monetary easing, which could cause the lending margin to shrink in addition to squeezing investment income, said Toyoki Sameshima, a senior analyst at SBI Securities Co.

Generally speaking, broad declines in interest rates could cause lending margins to shrink over time, eroding earnings at Japanese banks already struggling under the Bank of Japan’s negative-rate policy, said Ryoji Yoshizawa, senior director at S&P Global Ratings in Tokyo.

If the BOJ takes rates further below the current minus 0.1% it would dent bank earnings significantly, according to Yoshizawa. He estimates a cut to minus 0.2%, for example, would shave 6% from core profits at major banks and 21% from those of regional lenders. More local banks would also start to post losses, he said.

Before the coronavirus outbreak, Sumitomo Mitsui and Mizuho appeared set for a solid year of earnings, with both banks on course to achieve their profit goals for the year ending March 31. MUFG cut its annual profit goal last month after posting its first quarterly loss in a decade on a writedown in its stake in PT Bank Danamon Indonesia.

--With assistance from Shingo Kawamoto, Yuki Hagiwara and Taiga Uranaka.

To contact the reporter on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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