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Japan megabanks' credit costs may not return to pre-COVID levels in medium term

Banking Essentials Newsletter - November Edition

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Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery

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Japan megabanks' credit costs may not return to pre-COVID levels in medium term

Loan-loss provisions at the Japanese megabanks may not decline to pre-pandemic levels in the medium term, as the economic outlook remains clouded and it is uncertain how long and how much government support will last, bank executives and analysts say.

Mitsubishi UFJ Financial Group Inc. raised its loan-loss provision for the current fiscal year ending March 2021 to ¥500 billion, the highest among the megabanks, from an earlier estimate of ¥450 billion. It was after the bank reported ¥258.4 billion of loan-loss provisions for the fiscal first half ended Sept. 30, up sharply from ¥18 billion a year earlier.

Two other megabanks - Sumitomo Mitsui Financial Group, Inc. and Mizuho Financial Group Inc. - keep their credit cost projection unchanged for now at ¥450 billion and ¥200 billion, respectively, while remaining cautious about the default risk of their borrowers in the fiscal second half.

"Banks are usually cautious about their businesses," Yusuke Yasuoka, an analyst at Mitsubishi UFG Morgan Stanley Securities Co., said. "For now, they are extremely cautious about the development of the coronavirus pandemic."

The economic recovery from a deep slump in April and May has been slow and that challenge has been compounded by a fresh wave of coronavirus infections. For now, the banking groups are concerned about default risks of their borrowers as it is uncertain how long the government will support struggling businesses with zero-interest loans.

"We have to watch how the pandemic will keep affecting our business," Hironori Kamezawa, MUFG's president and CEO, said at an earnings press conference Nov. 13. "Even for the next fiscal year, I do not expect credit cost to return to the regular levels like ¥200 billion to ¥250 billion" before the pandemic.

Bankruptcies in Japan for the April-to-September period decreased 5.2% from a year earlier to 3,956, with total liabilities of about ¥601.2 billion, a 6.5% rise, according to Teikoku Databank.

"There were not as many bankruptcies as I had anticipated in the fiscal first half, but there are many borrowers with potential risks," Jun Ohta, SMFG’s president and CEO, said at a Nov. 13 press conference. "It's hard to tell whether credit costs will show up in the second half or in the next fiscal year."

Slightly upbeat for now

While the three banking groups posted double-digit profit declines for the April-to-September period, they achieved more than 60% of their profit target for the current fiscal year.

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MUFG's net profit for the six months through September plunged 33.9% from a year earlier to ¥400.8 billion, weighed down partly by swollen credit cost of ¥258.4 billion, which is more than half the revised full-year loan-loss provision.

The banking group raised its full-year net profit outlook by ¥50 billion to ¥600 billion, however, expecting to get a boost from strong overseas operations and continued cost-cutting efforts.

Mizuho also revised upward its net profit outlook for the fiscal full year to ¥350 billion from earlier estimated ¥320 billion, after seeing its profit for the fiscal first half slide 52% from a year earlier to ¥215.5 billion.

The banking group set aside ¥81.2 billion for loan loss provision for the fiscal first half, less than half the estimated ¥200 billion for the fiscal full year.

"There is a risk of a new wave of infections," Tatsufumi Sakai, MFG’s president and CEO, said at a Nov.12 earnings press conference. "We will have to be more cautious [about bad loans]."

Sumitomo Mitsui, which did not revise its earnings forecast, said its net profit for the fiscal first half slid 37.4% from a year earlier to ¥270.1 billion. That is 68% of its profit target for the full year.

Even so, "I am cautious about the outlook for our business," Ohta added. "I didn't have confidence that we could revise upward our earnings forecast."

As of Nov. 18, US$1 was equivalent to ¥103.74.