Japan's three biggest banks are targeting higher earnings in the 2024/25 fiscal year, hoping to gain from potentially higher interest rates and strong domestic funding demand after the central bank began normalizing monetary policy in March.

Mitsubishi UFJ Financial Group Inc., Japan's largest lender by assets, set a net income target of ￥1.5 trillion for the current fiscal year. It reported net income of ￥1.49 trillion for the 2023/24 fiscal year on May 15, up 33.5% year over year and its highest on record. MUFG aims to grow its profit to more than ￥1.6 trillion by the fiscal year ending in March 2027.

"We are now in a world of positive rates," said Hironori Kamezawa, MUFG's CEO, at a press conference following the bank's earnings, "so our interest margin will be improving."

Sumitomo Mitsui Financial Group Inc., the second-biggest lender, expects a 10% increase in earnings to ￥1.06 trillion for the current fiscal year, after posting a record ￥962.9 billon for the 2023/24 fiscal year.

Mizuho Financial Group Inc. is targeting a 10.5% increase at ￥750 billion, after reporting a 10% rise in the 2023/24 fiscal year at ￥678.9 billion.

All three megabanks expect the current fiscal year to be a record for net income.

Rate hikes expected

The Bank of Japan ended its negative interest rates policy in March, raising expectations that it will embark on further rate hikes this year. Higher rates will improve banks' net interest margins by widening the gap between lending rates and borrowing costs.

MUFG expects the monetary policy shift to contribute between ￥40 billion and ￥50 billion to its pretax profit for the current fiscal year, while SMFG and Mizuho anticipate the move will generate ￥40 billion and ￥45 billion in such profit, respectively.

The central bank "took appropriate action but that was just the first step" in the normalization of its monetary policy, Toru Nakashima, CEO of SMFG, said at a press conference May 15.

Additional rate hikes will help boost banks' interest incomes.

"The net interest margins [at the three megabanks] probably didn't improve much in the previous year," Takahide Kiuchi, executive economist at Nomura Research Institute, said before the banks' earnings announcements. "But this [fiscal] year, it should be wider because the short-term rates will likely rise more."

Growing loans

MUFG’s outstanding domestic loans grew 3.8% to ￥69.1 trillion, and by 13.6% to ￥46.8 trillion overseas during the year to March 31. SMFG increased domestic lending by 5.5% to ￥ 64.5 trillion and Mizuho by 3.7% to ￥55.8 trillion. While SMFG's overseas lending lifted by 10.2% to ￥36.6 trillion, Mizuho's loans outside Japan declined 5.7% to $250 billion.

Brisk capital spending, digital transformation and decarbonization are expected to support continued funding demand among Japanese companies. A total 265 large Japanese companies are estimated to increase operating profits by 8.9% year over year in the 2024/25 fiscal year on top of an expected 3% growth in revenue, according to a report by Nomura Securities in December 2023.

The banks are now more keen to collect deposits as they bet on domestic lending, raising ordinary deposit rates to 0.02% from 0.001% on April 1. Outstanding deposits at MUFG grew 4.9% to ￥224 trillion year over year as of March of 2024. At SMFG, they increased 2.3% to ￥ 153.5 trillion, and at Mizuho by 4.3% over the same period.