Japanese megabank margins set to improve on potential rate hikes

Japanese megabanks' net interest margins should recover in the coming quarters as the lenders pass on increases in domestic interest rates to customers, offsetting pressure on overseas lending margins.

Mitsubishi UFJ Financial Group Inc. (MUFG), Sumitomo Mitsui Financial Group Inc. (SMFG) and Mizuho Financial Group Inc. have faced falling net interest margins (NIM) similar to banks in many global markets with stabilized interest rates. But the Bank of Japan is expected to abandon its negative interest rate policy in 2024. This benefits Japanese banks, which generally raise loan rates before increasing deposit rates.

Shrinking margins

NIMs contracted for Japan's three megabanks in the October–December quarter of 2023, according to data compiled by S&P Global Market Intelligence. MUFG's NIM fell to 0.68% from 0.77% in the previous quarter, SMFG's decreased to 0.75% from 0.77% and Mizuho Financial's dropped to 0.37% from 0.43%.

"Their NIMs at home would increase if the interest rates are raised. Their margins overseas should come down on a possible US rates cut," said Toyoki Sameshima, an SBI Securities Co. senior analyst, adding that overall NIM should see a slight improvement as domestic loans outweigh overseas lending.

The megabanks are increasing deposits to prepare for positive interest rates in Japan. This shift comes as the central bank may end its negative interest rate policy as early as April, after it tightened policy by allowing yields on government bonds to rise higher.

Meanwhile, the US Federal Reserve is projected to loosen its monetary policy stance in late 2024.

"The US aims to make a soft landing on a plateau of slower growth as they are unlikely to cut rates drastically," said Takahide Kiuchi of Nomura Research Institute. This suggests Japan's potential rate hike will have a greater impact on the megabanks' NIMs.

– Click here to download a spreadsheet with data featured in this story. – Click here to read our recent story about major Indian banks' earnings in the quarter ended Dec. 31, 2023.

Slow and gentle

Japanese megabanks are unlikely to raise interest rates sharply as the nation recovers from the COVID-19 pandemic, Kiuchi said. A shift in Japan's monetary policy, combined with a potential US rate cut, could strengthen the yen, hurting exports.

In December 2023, domestic lending increased modestly year over year: MUFG by 0.4% to ¥67.4 trillion, SMFG by 4.2% to ¥62.7 trillion, and Mizuho Financial by 2.7% to ¥56.4 trillion, according to the banks' earnings statements. Overseas lending decreased at all three institutions: MUFG by 11.5% to ¥45.2 trillion, SMFG by 5.2% to $290 billion, and Mizuho Financial by 11% to $245.1 billion.

A 10-basis-point short-term rate hike could increase annual net interest income by ¥35 billion for MUFG and Mizuho Financial, and ¥30 billion for SMFG, according to separate statements by the lenders in 2023.

As of Feb. 14, US$1 was equivalent to ¥150.56.