Declining net interest margins (NIMs) at Japan's megabanks may soon be halted thanks to a tweaked central bank monetary policy.

NIM at Mitsubishi UFJ Financial Group Inc. (MUFG), Japan's biggest lender by assets, shrank to 0.7% in the April-to-June quarter from 1.20% a year ago amid tepid demand for credit, data compiled by S&P Global Market Intelligence shows. Similarly, Sumitomo Mitsui Financial Group Inc. saw its NIM fall to 0.72% from 0.77%, while that at Mizuho Financial Group Inc. fell to 0.41% from 0.50%, largely because the Bank of Japan (BOJ) has kept its benchmark interest rate negative since 2016.

While the BOJ is widely expected to hold rates steady through 2023, it tweaked its yield curve control (YCC) policy on July 28, allowing the 10-year yields to rise to as high as 1.0% from the previous tolerance of 0.5%. The YCC adjustment — an effective tightening of monetary policy — could allow banks to raise funds from the call market and to offer long-term loans with higher rates, such as mortgage loans.

"I expect the BOJ's move will have a positive impact on NIMs, this time domestically, where NIMs haven't risen in a long time," said Michael Makdad, a senior analyst at Morningstar.

Banks in the world's third-biggest economy suffered NIM pressure at a time when their peers across most of the developed world gained from being able to pass rising interest rates on to their customers. Banks across the US and Europe, and among Asian countries such as India and Singapore, have reported NIM gains as central banks tightened monetary policy from early 2022. The US Federal Reserve on July 26 hiked rates by 25 basis points and has left the door open for further tightening.

Solid profits

Despite the NIM contraction, Japanese megabanks are mostly on track to hit or exceed their profit targets for the year ending March 31, 2024.

MUFG posted nearly a fivefold gain in its net income year over year to ￥558.3 billion for the three months ended June 30, achieving 43% of its full-year target of ￥1.30 trillion. Mizuho's net income surged 53.8% year over year to ￥245.1 billion, about 40% of its fiscal full-year forecast of ￥610 billion.

Sumitomo Mitsui bucked the trend, reporting a 1.7% year-over-year decline in its net income to ￥248.9 billion, which is about 30% of its target for the fiscal full year.

"If we don't have a surprise downside event this year, the reasonable guess would be that the banks all slightly exceed their guidance, or meet it as a minimum," Makdad said.

Meanwhile, lending growth at the megabanks in the domestic market remained steady in the April-June quarter, according to the companies' filings.

MUFG increased its domestic outstanding loans to ￥66.5 trillion in June from ￥65.4 trillion a year ago, while Mizuho's average loans at home rose to ￥55.0 trillion from ￥54.4 trillion a year ago. SMFG's domestic lending increased to ￥61.0 trillion from ￥58.3 trillion in the year-ago period.

Overall loans by Japanese banks rose at least 3.0% year over year in every month for the first half of the year. Total loans stood at ￥603.36 trillion in June, according to BOJ data.

As of Aug. 9, US$1 was equivalent to ￥143.57.