Facing sluggish growth both at home and abroad and under pressure from a relatively stronger yen, Japan's megabanks are expected to report double-digit profit declines for their fiscal third quarter.
Net income at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. is expected to decline by almost 20% year over year in the quarter ended Dec. 31, 2016, according to mean estimates from S&P Capital IQ, an offering of S&P Global Market Intelligence.
Mitsubishi UFJ, the largest bank by assets in Japan, is expected to report the smallest decline at 10.1%. Peers Sumitomo Mitsui Financial and Mizuho are forecast to see declines of 27.7% and 19.7%, respectively.
Sumitomo Mitsui Financial will be the first of the three to report on Jan. 27.
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Slow domestic loan growth and falling interest margins continued to haunt Japan's lenders, while expectations of an overall increase in loan volumes for the fiscal year ending March 31 are unlikely to offset the decline in net interest margins this fiscal year, Toyoki Sameshima, a senior banking analyst at BNP Paribas Securities (Japan), told S&P Global Market Intelligence. He also expects margins to continue falling next fiscal year.
Loans extended by the five major city banks in Japan, including the megabanks, edged 0.4% lower by the end of 2016 from a year earlier, according to Japan Bankers Association data.
In a recent note, Sameshima forecast NIM at the three big lenders to decline between 5 basis points to 10 basis points for the current fiscal year.
Amid the bleak lending environment within Japan, overseas operations, which the lenders have looked to as a source of profitability, may not deliver. Overseas loans for the current fiscal year are estimated to increase by just 5% to 7% in dollar terms, down from 12% to 15% in the prior three years, according to Mia Nagasaka, a banking analyst at Morgan Stanley MUFG Securities.
Non-Japan loans have grown in importance for the megabanks in recent years, and Moody's estimates they account for 33% of total lending as of March 2016, up from 19% in March 2012.
In particular, uncertainty over newly inaugurated U.S. President Donald Trump's policies continues to cloud the outlook for the megabanks' Americas loan segment.
"Trump is expected to increase infrastructure investment, and if this will increase project finance demand, this may benefit Japanese megabanks that are interested in this area," Nagasaka said. She noted, however, that it remains unclear if the U.S. president will follow through on those promises so any impact is hard to predict.
Meanwhile, Trump could institute tax cuts and increase spending, which may push growth and inflation higher, leading to higher loan demand, said David Threadgold, a financial analyst at Keefe Bruyette & Woods in Tokyo.
On the flip side, should U.S. trade policy move in a way that results in steep tariffs on imports produced by companies deemed to be hurting American workers, that scenario would not be good for the global economy, Threadgold added.
The outlook for currency trends is likewise murky. The yen could strengthen due to protectionist U.S. policy, or it could weaken as a result of higher U.S. interest rates, said Takashi Miura, a banking analyst at Credit Suisse Securities (Japan).
The strengthening of the Japanese currency in the December 2016 quarter compared with a year earlier likely means overseas earnings declined in yen terms. The U.S. dollar traded at ¥116.64 at the end of 2016, while it was at ¥120.30 at the end of 2015.
Yet, the weakening of the yen quarter over quarter from the September 2016 period helped the megabanks' bottom line to some extent, said Yoshinobu Yamada, a senior banking analyst at Deutsche Securities in Tokyo. He estimates that Mitsubishi UFJ, Sumitomo Mitsui Financial and Mizuho saw boosts of ¥39 billion, ¥14.5 billion and ¥16 billion to net profit, respectively, as a result of the weaker Japanese currency.
Additionally, other economies in Asia would also feel the reverberations of any change to U.S. policy. Protectionism could slow growth in China and other Asian countries.
"Japanese megabanks' business in China and the rest of Asia could fall, too, so even if their lending in the U.S. expands, their overall overseas business may not expand," said Ryoji Yoshizawa, a Tokyo-based banking analyst at S&P Global Ratings.
As of Jan. 25, US$1 was equivalent to ¥113.64.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
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