Potentially higher interest rates in Japan will boost large banks' margins and improve profitability, helping to offset the drag from lower rates overseas.
Japan's three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — all posted quarter-over-quarter gains in their net interest margins (NIMs) in the January-to-March quarter as market rates in Japan started rising ahead of a widely anticipated end to Bank of Japan's negative interest rates policy. The Bank of Japan (BOJ) said March 19 that it will guide its short-term policy rate in a range of 0% to 0.1%, from the prior negative 0.1% introduced in 2016.
"Domestic margins should improve as interest rates will likely be raised further, while the US rates could move lower," said Toyoki Sameshima, a senior analyst at SBI Securities Co. "As [the banks'] loan portfolios in Japan are bigger than those overseas, overall NIMs should be picking up."
After the first hike since 2007, Japan's central bank is widely expected to raise rates further as it moves toward policy normalization after ending its eight-year experiment with unconventional monetary policy. In doing so, the BOJ is likely to diverge from other global central banks, which are widely expected to start reducing rates after they have greater certainty that inflation is getting under control. Japan faces inflationary pressures as the yen's fall to a record low against the dollar makes imports more expensive. The US dollar has gained more than 8% on the yen so far this year.
Appropriate action
The BOJ "took appropriate action, but that was just the first step" in the normalization of its monetary policy, said Toru Nakashima, CEO of SMFG, at a press conference May 15 when it released its full-year earnings.
SMFG's NIM rose to 0.88% in the January-to-March quarter from 0.79% a year ago, according to S&P Global Market Intelligence data. NIM at MUFG widened to 0.77% from 0.71% during the same period. Mizuho posted a year-over-year decline in NIM to 0.40% from 0.45%, although its margin was higher than 0.37% in the October-to-December quarter, the data showed.
At the end of March, domestic loans accounted for 60% of MUFG's loan portfolio, 64% at SMFG and 61% at Mizuho. MUFG's outstanding domestic loans grew 3.8% over the year to ￥69.1 trillion as of March 31. Its overseas loans rose 13.6% over the same period to ￥46.8 trillion.
MUFG expects the BOJ's March monetary policy shift to contribute between ￥40 billion and ￥50 billion to the lender's net interest income for the current fiscal year. It estimates a further 15-basis-point increase in the policy rate to add ￥150 billion to its net interest income annually by 2027.
SMFG increased its domestic loans by 5.5% to ￥64.5 trillion in the fiscal year that ended March 31, compared with a 10.2% increase in overseas lending to ￥36.6 trillion.
Mizuho's loans at home climbed 3.7% to ￥55.8 trillion, while its lending overseas shrank 5.7% to $250 billion, reflecting "weak funding demand," Masahiro Kihara, the bank's CEO, said at a press conference May 15.
End of an era
With negative interest rates behind them, Japanese banks are now keen to collect deposits by offering higher rates to customers. The three banks all lifted ordinary deposit rates to 0.02% from 0.001% on April 1. Overall outstanding deposits at MUFG grew 4.9% year over year to ￥224 trillion as of March 31. SMFG posted a 2.3% gain to ￥153.5 trillion and Mizuho was up 4.3% to ￥171 trillion over the same period.
Potentially wider NIMs would help the three megabanks to shoot for record high earnings in the current fiscal year that started in April.
MUFG set a net income target of ￥1.5 trillion for the fiscal year ending March 31, 2025, after a record ￥1.49 trillion earned in the year that ended March 31. The lender set an income target of ￥1.6 trillion by March 2027. "We are now in a world of positive rates ... so our interest margin will be improving," MUFG CEO Hironori Kamezawa said at a press conference following the bank's earnings May 15.
SMFG is targeting a 10% increase in net income to ￥1.06 trillion for the current fiscal year, while Mizuho targets 10.5% growth to ￥750 billion.