A sharp increase in loan-loss provisions is set to hit the earnings of Japan's largest lenders in the fiscal year ending March 2021 as more bank loans may turn sour while the pandemic slows or shutters businesses.
Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. expect double-digit net profit declines for the current fiscal year, while Mitsubishi UFJ Financial Group Inc. projects a modest single-digit increase in its bottom-line largely due to an absence of one-time valuation losses on its overseas investments. The three megabanks expect loan-loss provisions for this fiscal year to rise to ¥1.100 trillion combined, up from ¥565.25 billion in the prior fiscal year.
"The banks [are bracing] themselves for a challenging year ahead," Tetsuya Yamamoto, a senior credit officer at Moody's Japan, said in a report on May 19. "We expect nonperforming loan ratios, profitability and capital to deteriorate at all three megabanks as a result of the growing disruptions to economic activity and market upheaval caused by the coronavirus outbreak, coupled with sharply lower oil prices."
As the coronavirus outbreak pushed more corporates to file for bankruptcy, rising loan defaults have become the latest challenge facing Japanese megabanks that for years have been struggling with ultra-low interest rates and modest loan growth at home. The delay of the Olympic Games for at least another year introduces additional uncertainty to the economic outlook. Cost-cutting initiatives and overseas expansion have helped their earnings, but not enough to offset their overall weak profitability.
The number of Japanese corporate bankruptcies in April rose about 16% from a year earlier to 758, the highest in about five years, according to Japanese research company Teikoku Databank. Total liabilities rose 54% to about ¥161 billion, it said.
The three banks lend not only to large companies but also small businesses in Japan, which may be facing a bigger risk from the coronavirus disruption, according to Toyoki Sameshima, a senior analyst at SBI Securities Co.
In the first quarter of 2020, the Japanese economy entered into a recession for the first time since the second half of 2015. Household spending declined 3.1% in the first quarter, overall domestic demand declined 2.6% while gross fixed capital formation fell 4.0%.
A private survey by au Jibun Bank and IHS Markit released earlier in May showed Japanese business activity dropping to a record low in April amid a deepening downturn in both the services and manufacturing sectors, boding ill for GDP in the second quarter and beyond.
Risk assets may increase
"There is a possibility that our risk [weighted] assets will increase," Hironori Kamezawa, MUFG’s president and CEO, told a conference call on May 20. The bank said its risk-weighted assets were more than ¥115 trillion as of end-March, down from about ¥125 trillion in the prior fiscal year.
MUFG is seeking a 4% net profit rise to ¥550 billion in the current fiscal year after suffering a 39.5% plunge in its bottom-line in the previous fiscal year. If the one-time valuation losses on its overseas investments in the last fiscal year were excluded, the earnings target of the current fiscal year would have been a year-over-year decline. In the fiscal fourth quarter ended March 31, the bank reported a net loss of ¥56.13 billion, compared with a net profit of ¥457 million a year earlier.
The megabank expects its loan loss provisions to more than double to ¥450 billion in the current fiscal year. It also expects to miss a return-on-equity target of 7% to 8% previously set for the current fiscal year, CFO Tetsuya Yonehana said May 15. The bank's ROE stood at 3.85% in the fiscal year ended March 31.
Sumitomo predicts a 43% drop in net profit to ¥400 billion for the fiscal year ending in March 2021, after reporting a 3% profit decrease in the previous year. In the fiscal fourth quarter ended March 31, the bank reported a net profit of ¥93.05 billion, up from ¥88.80 billion a year earlier.
It estimates that its loan-loss provisions will almost triple to ¥450 billion, of which ¥290 billion is provisioned for Sumitomo Mitsui Banking Corp., the core lending unit of the group. About 60% of that amount is reserved for Japanese companies, splitting evenly between big and small businesses in the country, Sameshima estimated.
Mizuho forecasts its net profit will shrink by 29% to ¥320 billion for the current fiscal year, reflecting a 16% year-over-year rise in loan-loss provisions to ¥200 billion. In the fiscal fourth quarter ended March 31, the bank reported a net profit of ¥44.61 billion, compared with a net loss of ¥313.36 billion a year earlier.
As of May 25, US$1 was equivalent to ¥107.69.