MUFG, SMFG top lenders in S&P Global Japanese bank performance ranking

Mitsubishi UFJ Financial Group Inc. topped the inaugural S&P Global Market Intelligence ranking of the 50 largest Japanese banks based on financial performance.

Sumitomo Mitsui Financial Group Inc., Japan's second-largest lender by assets, was second in the Market Intelligence rankings and Mizuho Financial Group Inc. Ltd., the third-biggest, took the sixth position. The rankings take into account performance of Japan-based lenders on seven weighted financial metrics, including return on average equity, net interest margin, cost-to-income ratio and nonperforming loan ratio, as of March 31.

In this analysis, companies were ranked according to seven weighted financial metrics: Return on average equity (16%), net interest margin (16%), net fee and commission income/average assets (16%), cost-to-income (16%), problem loan ratio (16%), liquid assets/assets (10%) and common equity Tier 1 ratio (10%). The mean for each metric was identified across the sample, and standard deviations from these means were calculated for each metric for each institution and aggregated to determine a relative performance score. Scores for each metric were capped to help normalize the data.

A similar ranking of banks in mainland China can be found here and Europe here.

Japanese banks expect to improve net interest margins as they are entering positive interest rates after the Bank of Japan exited from its negative rate policy in March. The Bank of Japan raised its benchmark interest rate to 0.25% from a range of zero to 0.10% on July 31 and said further hikes will follow if the economy tracks projections. The central bank also unveiled plans to reduce its government bond purchases as it accelerates a shift toward tighter monetary policy.

The nation's megabanks — Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group — plan to reap record earnings in the fiscal year ending March 2025, benefiting from higher net interest income driven by the The Bank of Japan's policy shift and the yen's continued weakness that makes growing gains from their operations outside Japan worth more in the domestic currency.

Japanese banks are also keen to increase return on equity as they intend to improve capital efficiency and raise their price-to-book ratios in response to growing investor demand after the Tokyo Stock Exchange in March 2023 urged Japanese companies priced below book value to raise their ratios to above 1.0.

Some major regional banks also performed well in the Market Intelligence ranking. Shizuoka Financial GroupInc. came in third, followed by The Chiba Bank Ltd. at fourth and Iyogin Holdings Inc. at fifth.

Overall, smaller regional banks were lackluster, with their net interest margins and common equity Tier 1 ratio scores in negative territory. Banks received a positive score if a performance metric was better than the top 50 average and a negative score if the metric underperformed.

Smaller lenders are in a weaker position than major banks to pass higher fundraising costs on to their customers as they pay higher deposit rates amid a trend of rising interest rates.

SBI Sumishin Net Bank Ltd. was ranked seventh in the performance ranking, the only digital bank listed, with the highest return on average equity score of 0.32 among the 50 peers. The three megabanks, SBI Sumishin and only three regional banks posted a score of 0.10 or more in ROAE.