Japanese megabanks' ROE set to taper after strong fiscal Q1

Japanese megabanks will likely earn less profit from their shareholder equity over the next few quarters amid flat net interest margins and an uncertain outlook on credit risks.

The return on average equity of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. more than doubled in the three months ended June 30 from the previous quarter. Their ROAEs were boosted by one-off gains or sharply lower loan-loss provisions, while other components of the key profitability metric — operational efficiency and returns on interest-earning assets — further weakened or improved marginally.

"Can [the three megabanks] keep quarterly earnings seen in the fiscal first quarter for the rest of the year? The short answer is no," said Toyoki Sameshima, a senior analyst at SBI Securities Co.

The ROAEs of Japanese lenders are among the lowest in Asia-Pacific, as yields on loans and domestic bond investments have been constrained by the nation’s chronically low interest rates. The banking industry has also been struggling to reduce costs for years, as the culture of lifetime employment makes it difficult to lay off staff or shutter branches despite weak loan demand, especially in rural areas.

The lingering pandemic in Japan, which led to the nation’s fourth state of emergency for Tokyo since late July, could also render the improvement of asset quality in the previous quarter short-lived.

“We have to watch the loan loss provisions very cautiously,” said Makoto Umemiya, Mizuho’s CFO, in a July 30 investor conference.

One-off gains

Mizuho was the most profitable Japanese megabank in terms of return on shareholder equity, which includes outstanding shares and retained earnings, in the fiscal first quarter. The lender reported an ROAE of 10.75%, meaning it generated ￥0.1075 in net profit for every ￥1 invested by shareholders, the highest in almost eight years, according to S&P Global Market Intelligence.

Mizuho’s April-June ROAE was boosted by a ￥28.6 billion gain from the cancellation of an employee retirement-benefit trust, as well as ￥69.6 billion of tax benefits and a ￥2.6 billion writeback of loan-loss provisions.

Its net interest margin as of end-June stood at 0.46%, down from 0.54% in the previous quarter but unchanged from a year earlier. Its consolidated general and administrative expenses excluding nonrecurring losses fell 2.7% from a year earlier.

“The one-off events [in the fiscal first quarter] won’t be repeated in following quarters but might be partially reversed,” said Michael Makdad, an analyst at Morningstar.

Thinning margins

Two other megabanks also posted their highest ROAEs in almost two years: Mitsubishi UFJ Financial Group, or MUFG, posted a return of 8.95%, followed by Sumitomo’s 6.85%.

SBI Securities' Sameshima expects all three megabanks to report ROAEs of between 5% and 5.8% for the fiscal year ending March 2022.

The biggest driver of their ROAEs was sharply lower credit costs. In the three months ended June 30, Sumitomo booked ¥10.3 billion in loan-loss provisions, or 6% of its ¥170 billion target for the fiscal year ending March 2022. MUFG budgeted ¥5.1 billion as buffers against troubled loans, or 1.4% of its full-year target of ¥350 billion.

Meanwhile, their expenses were still elevated: MUFG’s expense ratio rose 8 percentage points to 70.3% from a year earlier, while Sumitomo’s overhead ratio rose 1.2 percentage point to 63.3% from a year earlier.

MUFG's net interest margin stood at 0.63% as of end-June, compared with 0.67% in the previous quarter and 0.65% from a year earlier. Sumitomo's net interest margin stood at 0.67% as of end-June, down from 0.73% in the previous quarter but up from 0.66% a year earlier.

As of Aug. 9, US$1 was equivalent to ¥110.22.