Japan's megabanks likely to boost margins, profits as interest rates rise

Japan's three megabanks are likely to grow their margins and profits as the nation's central bank expects to stay on its rate hike trajectory in 2025.

Net interest margin (NIM) at Mitsubishi UFJ Financial Group Inc. (MUFG) grew to 0.77% in the December 2024 quarter, from 0.68% a year earlier, according to S&P Global Market Intelligence data. Sumitomo Mitsui Financial Group Inc. (SMFG) increased its NIM to 0.87% from 0.75% over the same period, while Mizuho Financial Group Inc. improved its NIM to 0.44% from 0.37%.

"Their NIMs will improve more and more," as lenders benefit from higher interest rates, said Toyoki Sameshima, a senior analyst at SBI Securities Co.

The Bank of Japan (BOJ) has raised its benchmark rate three times since it abandoned its negative interest rate policy in March 2024. The central bank is expected to stay on a path of monetary policy normalization after raising its policy rate to 0.5% from 0.25% in January. Most economists expect the BOJ's benchmark rate to rise to 1.0% by the end of 2025. The sentiment was echoed by Naoki Tamura, a member of the BOJ's policy board, who said at a Feb. 6 event that the central bank would need to raise the rate to at least 1.0% by the second fiscal half.

Mizuho has already exceeded its annual net profit income target of ￥820 billion in the nine months to December 2024. MUFG hit 99% of its net income target of about ￥1.750 trillion during the nine-month period, while SMFG was 2% shy of its ￥1.16 trillion earnings goal. The fiscal year in Japan runs from April to March.

Trump effect

Analysts are watching the rapid pace of global developments under US President Donald Trump. The threat of potential US tariffs will remain a factor in Japan's monetary policy normalization.

"The BOJ will continue its rate hike cycle unless a clear risk emerges" that US President Donald Trump's tariff policy will become a drag on the Japanese economy, said Tsuyoshi Ueno, a senior economist at NLI Research Institute.

The megabanks expect to cash in on higher rates as they can pass on higher charges to their customers relatively easily. MUFG estimates that the January rate hike will add ¥20 billion in net interest income for the current fiscal year through March 2025, and ¥100 billion annually from the financial year starting April 1, according to a Feb. 4 earnings statement.

SMFG also expects the rate increase in January to contribute about ¥100 billion to net interest income per year, in addition to a total of ¥100 billion added from previous hikes in July and March 2024. The lender said a 25-basis-point rate increase will generate an additional ¥100 billion.

Mizuho said the three rate hikes so far will likely add ¥105 billion in net interest income for the fiscal year ending March 31 and estimates this to more than double to ¥225 billion in the next fiscal year.

Loan demand is strong for the megabanks. MUFG's outstanding loans in and outside Japan increased 6% from a year earlier to ¥125.6 trillion in December 2024, while SMFG's global outstanding lending grew about 9.3% to ¥106.7 trillion. Mizuho increased its total loans by 6.5% to ¥97 trillion during the same period.

As of Feb. 14, US$1 was equivalent to ¥152.07.