Japan's megabanks to reward shareholders with higher dividends as profits rise

Japan's megabanks are likely to increase dividend payouts over the next two years as profit margins rise in an improved business environment, according to S&P Global Market Intelligence estimates.

Mitsubishi UFJ Financial Group Inc. (MUFG), Sumitomo Mitsui Financial Group Inc. (SMFG) and Mizuho Financial Group Inc. are expected to maintain the dividend payout ratio at 40%, similar to the last fiscal year. MUFG will likely pay ￥50.5 per share in dividends for the current fiscal year that ends March 31, 2025, and raise it to ￥55 in the next fiscal year, according to Market Intelligence estimates. The biggest Japanese bank by assets paid ￥41.0 per share in the fiscal year that ended March 31, 2024.

SMFG is estimated to offer ￥331.0 per share in the current fiscal year and increase dividend payment to ￥358.0 per share in the fiscal year that will start April 1, 2025. The megabank paid ￥270.0 per share in the year ended March 31, 2024. Similarly, Market Intelligence expects Mizuho to raise its dividend payout to ￥117.3 per share in the current fiscal year and to ￥128.2 per share in the next fiscal year after offering ￥105.0 per share last year.

"[The three megabanks] are coming under pressure from shareholders to increase dividend," said Takahide Kiuchi, executive economist at Nomura Research Institute. "They will keep increasing the payouts as long as they are in good shape."

Income growth

Strong income growth will allow the banks to pay higher dividends or buy back shares at a time when interest in Japan's stocks is surging.

All three megabanks expect to grow their incomes in the coming years from profits and from dilution of traditional cross holdings in other companies. The megabanks are also keen to boost their price-to-book value ratios after the Tokyo Stock Exchange urged companies priced below book to aim for a threshold of at least 1.0x in March 2023.

"A favorable business environment, coupled with the elimination of the negative interest rates impact and increased income from loans both in Japan and overseas, supports the expectation of rising income and, consequently, higher dividends," said Tusharika Aggarwal, an equity research and fixed income specialist at Market Intelligence.

Under its three-year plan through March 2027, MUFG aims to lift its net income to more than ￥1.6 trillion by focusing on Asian operations, increasing from the ￥1.5 trillion net income projected in the fiscal year ending March 2025 and from the ￥1.49 trillion earned for the last fiscal year.

SMFG expects a 10% increase in earnings to ￥1.06 trillion for the current fiscal year and aims to lift it to more than ￥1.1 trillion in the next fiscal year after posting a record ￥962.9 billion in the previous year. Mizuho is targeting a 10.5% increase to ￥750 billion in net income this fiscal year, after reporting a 10% rise in the last fiscal year to ￥678.9 billion.

MUFG improved its price-to-book ratio to 1.07x as of July 10 on the back of a 46% jump in its share price since the start of 2024, Market Intelligence data shows. The data shows that SMFG was priced slightly below its book value at 0.99%, while Mizuho's price-to-book value was 0.86% on July 10.

Surging shares

Japan's benchmark Nikkei 225 index has gained about 14% so far this year, touching an all-time high of ￥42,426 on July 11. Lenders are preparing for further rate increases after the Bank of Japan gave up its experiment with negative interest rates in March and raised the benchmark policy rate to a range of 0% to 0.1%, the first in 17 years.

The central bank has indicated that it expects to raise rates further if it confirms a "virtuous cycle" of rising wages and inflation sustains near its target of around 2.0%. A rate hike would support banks' margins, especially the megabanks as they are in a stronger position than regional lenders to pass higher rates to customers. The central bank also plans to reduce Japanese government bond purchases, leading to higher market rates.

Cross shareholdings

Separately, Japanese banks are increasingly unwinding their cross shareholdings in other companies as part of their corporate reform. Income from such stake sales is expected to boost shareholder returns.

"We will allocate cash to dividend payment and future growth investment through higher net income as we will definitely have to raise our [price-to-book ratio] to more than 1.0 times," Mizuho CEO Masahiro Kihara said during a press conference in May.

MUFG plans to sell another ￥350 billion of strategic shares in other companies by March 2027 after unloading ￥539 billion of such shares in the previous three years through March 2024, leaving ￥1.34 trillion of those shares, the lender said in its fiscal first-quarter earnings release in May.

SMFG, which held ￥1.01 trillion of strategic shares in March 2024, aims to sell more than ￥200 billion of such shares between April 2023 and March 2026, while Mizuho, which owned ￥916.9 billion in March 2024, plans to sell ￥300 billion worth of such shares in the same three years.

As of July 29, US$1 was equivalent to ￥153.94.