Japan's three megabanks may abate the decline in their net interest margins as efforts to revive economic growth could boost domestic credit demand.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. faced a squeeze on their NIMs in the fiscal third quarter ended Dec. 31, 2022, as the Bank of Japan's ultraloose monetary policy limited the rates lenders can charge their customers.
As most central banks continued to raise rates through 2022 to tame inflation, the Bank of Japan was an outlier, keeping its benchmark rate at negative 0.10%. A change of guard at the central bank in April is unlikely to quickly reverse the ultraloose policy as the incoming governor, Kazuo Ueda, may focus on reviving credit growth.
"The short-term interest rates at home will remain low, while long-term yields could rise," said Takahide Kiuchi, executive economist at Nomura Research Institute. This should benefit the megabanks given that higher overseas rates could continue to raise funding costs for them.
The Bank of Japan's current governor, Haruhiko Kuroda, surprised markets in December 2022 by an in-effect tightening of monetary policy by announcing a change in its yield-curve control policy, raising the possibility of more such moves in the future.
"In the new fiscal year and beyond my forecasts are for flat NIMs or even slightly increasing, as I expect domestic loan interest rates to rise a bit," Michael Makdad, a senior analyst at Morningstar, said.
Analysts expect the U.S. Federal Reserve to continue with its monetary tightening in 2023, even though the pace may slow. That could also support the Japanese banks' NIMs, as it did for global banks.
"There will be no end [soon] to increasing federal funds rates in the U.S.," said Toyoki Sameshima, a senior analyst at SBI Securities. That could make it easier for Japanese banks to raise lending rates, Sameshima added.
Mitsubishi UFJ Financial's NIM for the fiscal third quarter declined to 0.79% from 1.20% in the fiscal first quarter ended June 30, 2022, according to S&P Global Market Intelligence data. Over the same period, Sumitomo Mitsui Financial's NIM fell to 0.71% from 0.77%, while Mizuho Financial's dropped to 0.41% from 0.50%.
All three lenders have already achieved or reached close to their net income targets for the fiscal year ending March 31, though they did not raise their full-year targets.
The three megabanks increased their combined loan loss provisions to ￥283.53 billion for the fiscal third quarter from ￥274.52 billion in the prior-year period, according to S&P Global Market Intelligence.
As of Feb. 17, US$1 was equivalent to ￥134.39.