Japan's regional banks may not be able to sustain the spurt in their income seen in the April-to-June quarter as they need to step up provisioning for potential bad loans after a government support program ended.
Japan's regional banks, such as The Bank of Kyoto Ltd. and Concordia Financial Group Ltd., are often the primary lenders for small and medium-sized enterprises and were offered interest-free loans under a government stimulus program since May 2020. That helped bolster their lending to such companies. The government subsidy program ended in March and banks now need to take the risk on their loan books, analysts have said.
"Obviously, such a profit growth should be temporary," said Takahide Kiuchi, executive economist at Nomura Research Institute. "They were just lucky as the more they lent, the more they earned."
Japanese lenders, mainly the smaller regional banks, have suffered the effects of ultralow interest rates and the nation's changing demographic profile, which has hampered loan demand. The government is pushing regional banks to consider consolidation to achieve scale. The drag is also likely to be visible on the earnings of Japan's three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — with their average return on equity likely to taper off during the rest of the year amid flat net interest margins.
The regional banks' loan loss provisions "probably will increase in the second quarter," said Toyoki Sameshima, a senior analyst at SBI Securities.
The combined net profit of 87 regional lenders in a Morningstar sample jumped 58% year over year to ¥320 billion in the fiscal first quarter, according to data from the financial services company. Aggregate loan loss provisions at the regional banks declined to ￥17 billion in the quarter, from ￥73 billion a year ago, as several lenders reported writebacks of prior provisions.
The first-quarter net profit of banks in the sample has already crossed 40% of Morningstar's full-year earnings estimate. However, the provisions represent just 4% of its back-of-the-envelope estimate of ￥427 billion in the fiscal year to March 2022.
The loan loss reserves in the April-to-June quarter were at "an abnormally low level, supported by writebacks at some regional banks," said Michael Makdad, an analyst at Morningstar.
Growth drag
With the economy now forecast to grow 3.7% in the fiscal year through March 2022, down from a previous government forecast of 4%, the drag on smaller banks may increase. In addition, the COVID-19 pandemic has worsened in Japan, forcing the government to expand the state of emergency to eight more prefectures on Aug. 27, taking the total to 21.
Bank of Kyoto reported a writeback of about ￥1.5 billion in the three months through June, a turnaround from about ￥1.0 billion in cost a year earlier. The bank expects ￥9 billion in loan loss provisions for the fiscal full year.
"The writeback is temporary," a bank spokesman said, adding that the end of the government subsidy and the health crisis will hinder the prospects for the bank's business for the rest of the fiscal year. The local bank, which posted a 57.3% jump in its fiscal first-quarter net profit to ￥13.9 billion, predicts its fiscal full-year earnings to remain little changed at ￥17 billion.
Bankruptcies in Japan between January and June came to 3,044, the lowest in 31 years, supported by the government subsidy, according to data from Tokyo Shoko Research. Pandemic-induced bankruptcies stood at 762 for the first half of the year, the data showed.