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Japanese banks scale back on Russia exposure as Ukraine war rages on

Japanese megabanks are scaling back on their exposure to Russia amid the ongoing invasion of Ukraine, allowing them to reduce provisions for possible bad loans.

The three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — pared their combined loan-loss provisions for the fiscal year that started April 1 to ¥610 billion from ¥840.9 billion in the previous year. The amount set aside last year included ¥331.1 billion for their exposure to Russian businesses.

"We cut our [Russian] deals drastically," SMFG CEO Jun Ohta said during a post-earnings press conference on May 13. "For now, we're returning to normal [credit-cost] level."

Japanese lenders, along with their global peers, are preparing for higher rates as the world's major central banks, including the U.S. Federal Reserve, abandon their ultra-loose monetary policy stance. Many analysts believe that global central banks fell behind the curve in tightening monetary policies and now need to raise rates aggressively to tamp down inflationary pressures. The disruptions caused by Russia's war in Ukraine have put additional pressure on prices, especially of energy and commodities.

"We'll wait and see the environment and various risks before making a decision," Ohta said. "A paradigm shift is being made and this could continue for [the] mid or long-term."

Conservative stance

MUFG, Japan's biggest bank, said it will set aside ¥300 billion in loan-loss reserves for the current fiscal year, down from ¥331.4 billion in the prior year. SMFG set aside loan-loss reserves of ¥210 billion for the current fiscal year, down from ¥274.4 billion in the previous year, while Mizuho will allocate ¥100 billion in loan-loss reserves, compared to ¥235.1 billion in the fiscal year that ended March 31.

MUFG set a ¥1 trillion earnings target for the current fiscal year, after reporting ¥1.13 trillion net profit in the last fiscal year on May 16. "We aim to generate ¥1 trillion profit in a stable manner," CEO Hironori Kamezawa said at a press conference.

SMFG expects net profit in the current fiscal year to rise 3.3% to ¥730 billion, while Mizuho expects its net profit to increase 1.8% year over year to ¥540 billion.

"We'll take a conservative stance" on global operations given the high interest rates, Mizuho CEO Masahiro Kihara said at a separate earnings briefing on May 13.

As of May 13, US$1 was equivalent to ¥129.23.