Japanese megabanks wait on new fiscal policy to boost stuttering ROE

Japanese megabanks look set to benefit in the fiscal year starting April 1, as an expected change in monetary policy will likely boost their struggling net interest margins.

The banks' profitability, measured by return on equity (ROE), has been inconsistent throughout the financial year, according to S&P Global Market Intelligence data.

Except for Mitsubishi UFJ Financial Group Inc. (MUFG), the megabanks suffered year-over-year ROE declines, the data shows. ROE at MUFG more than doubled to 7.97% in the July-to-September quarter from 3.13%, while those at Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. fell to 8.16% and 7.13%, respectively, from 8.77% and 7.83%. But MUFG saw ROE decline sharply from 12.29% in the April-to-June fiscal quarter, while SMFG's ROE climbed quarter over quarter from 7.44%. Only Mizuho recorded declining ROE on an annual and quarterly basis.

The Bank of Japan's anticipated policy shift, expected by April 2024, could improve the situation. The central bank has made three adjustments to its yield curve control policy since December 2022, allowing long-term yields to rise above 1.0% temporarily. This increase in long-term yields will benefit banks by raising rates on medium- to long-term fixed-rate loans, improving their margins.

"For the next fiscal year, they could enjoy higher interest margins if the central bank changes its monetary policy," said Shinichi Tamura, a senior analyst at Okasan Securities.

Rising ROE

Analysts expect the megabanks' ROEs would remain relatively stable until the financial year-end, with an expected increase thereafter due to the policy change. MUFG's ratio could reach 8.4%, SMFG's 6.9%, and Mizuho's 8.6% in the fiscal year starting April 1, said Morningstar analyst Michael Makdad.

The megabanks are, meanwhile, keen to raise their ROEs as they seek to improve their price-to-book ratios (PBR) to comply with a Tokyo Stock Exchange directive. The bourse in March asked companies with PBRs below 1.0 to disclose specific policies and initiatives to lift their value as it sought to raise management awareness of capital costs and stock prices. Like many other Japanese companies, the three megabanks fall short of the threshold.

"We're committed to improving PBR" by raising ROE, Mizuho CEO Masahiro Kihara said during a Nov. 13 conference. Mizuho aims to enhance asset quality, cut costs and expedite its overseas expansion. The bank has set a goal of increasing its ROE to 8%, from 6.8% in September, and achieving a PBR of 1.0. But the timing for these targets was not specified.

MUFG set a ROE target of 7.5% in March 2024, the end of its three-year plan, as the lender focuses on raising profits, shedding costs and curbing risk-weighted assets. As part of reducing its risk-weighted assets, SMFG said Nov. 14 it would sell off its underperforming US freight car leasing business and reallocate resources to a growth area to improve a capital efficiency.

Unrealized losses

The megabanks could book losses on Treasurys and overseas bond investments by the end of this fiscal year, putting pressure on profits and ROEs, analysts said. As of September, total outstanding unrealized losses from their overseas bond investment stood at ￥3.4 trillion.

"[The megabanks] may have to adjust balance sheets at the end of this fiscal year, probably by booking a loss from their investment in Treasurys," said Okasan Securities' Tamura.

"We may have to incur a loss from overseas bond investment for the rest of the fiscal year," MUFG CEO Hironori Kamezawa said during a Nov. 14 earnings conference. Accordingly, MUFG kept its profit guidance unchanged at ￥1.3 trillion for the year ending March 31, 2024, while its two peers upgraded their forecasts for fiscal-year net income.

SMFG upgraded its full-year net income estimate to a record ￥920 billion from its earlier projected ￥820 billion, while Mizuho revised upward its profit outlook to ￥640 billion from its previous forecast of ￥610 billion, according to the banks.

As of Nov. 21, US$1 was equivalent to ¥147.93.