Japanese megabanks' fiscal H1 profits to rise YOY on higher rates, loan growth

Japan's three megabanks are expected to report year-over-year increases in net income for the six months ended Sept. 30 as they benefit from higher interest rates, strong loan demand and the yen's depreciation against the US dollar.

Net income at Mitsubishi UFJ Financial Group Inc., the country's biggest lender by assets, is forecast to grow 5.6% year over year in the fiscal first half to ￥979.21 billion, according to consensus estimate data from Visible Alpha, a part of S&P Global Market Intelligence. Sumitomo Mitsui Financial Group Inc.'s net income for the period is expected to rise 26.4% to ￥665.34 billion, while that of Mizuho Financial Group Inc. is estimated to climb about 18% to ￥490.41 billion.

"It's certain they [the megabanks] will report solid earnings [in the fiscal first half] as they are supported by a variety of events such as higher rates, the weaker yen and robust cash demand," said Toyoki Sameshima, a senior analyst at SBI Securities Co.

The three megabanks are scheduled to report their results on Nov. 14.

Higher rates, loan demand

Japanese banks are likely to benefit as the country prepares to fully exit years of ultra-loose monetary policy. The Bank of Japan (BOJ), which raised short-term rates twice this year, is expected to consider another policy rate hike in December, according to economists. The BOJ's policy shift allowed the megabanks to raise their prime rates, a base for housing loans, to 1.625% from 1.475% in September. This was the first time in more than 17 years that lenders raised their short-term prime rates.

The megabanks are seeing a net interest income boost on the back of strong loan demand from businesses in Japan.

Net interest income at MUFG is estimated to grow 19.8% year on year to ￥1.473 trillion for the fiscal first half, Visible Alpha data shows. SMFG's net interest income is forecast to rise 17.9% to ￥1.047 trillion, while that of Mizuho is projected to grow 8.0% to ￥491.27 billion.

Major Japanese banks, including the megabanks, increased average outstanding loans in the third quarter by 3.5% from a year earlier, following a 4.2% growth recorded in the second quarter, according to the BOJ data. This was higher than Japanese regional banks' loan growth of 3.1% in the third quarter and 2.9% in the previous three months.

Yen's depreciation

Given their substantial overseas exposure, the megabanks are likely to benefit from the yen's depreciation against the US dollar, analysts said. This currency depreciation inflates the value of profits earned overseas when converted into the local currency.

The yen was weaker than the ￥150 per US dollar level for most of four months between April and July this year — sliding past the ￥160 level at some points — before recovering to hover over ￥140 in August and September. In contrast, it was in a narrow range of between ￥132 and ￥143 per US dollar during the same six months of the previous year.

The megabanks may face the risk of increasing credit costs as higher rates could increase Japan's corporate bankruptcies, according to Michael Makdad, a senior analyst at Morningstar, and SBI's Sameshima.

Loan loss provisions for MUFG in the fiscal first half are estimated to rise to ￥280.94 billion from ￥181.23 billion a year earlier, while SMFG's credit costs are forecast to drop to ￥99.47 billion from ￥100.34 billion, and Mizuho's are projected to nearly triple to ￥31.29 billion from ￥11.07 billion.

"Loan loss provisions have not yet surfaced," Sameshima said. "But you need to pay attention to them."

As of Nov. 8, US$1 was equivalent to ¥152.63.