Japanese banks to hit profit targets as stimulus cuts bad loans

Japan’s three biggest banks are expected to stay on course towards meeting their annual profit targets as bad loan costs remain under control, analysts said ahead of expected second-quarter fiscal results this week.

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. expect credit costs – which include provisions as well as actual losses on bad loans – to nearly double to 1 , 1 trillion yen in the year ending March, the highest combined amount in 11 years.

Massive government and central bank aid boosted lending and kept businesses afloat during the pandemic-fueled recession, reducing the need to increase provisions. The investment bank has recovered, helping to mitigate the impact of low interest rates which squeeze the profitability of loans at home and abroad.

“I expect their second quarter results to be not bad,” said Toyoki Sameshima, analyst at SBI Securities Co. Thanks to the stimulus measures, “the emergence of bad loan costs is being pushed back and may even be postponed to the next fiscal year, ”he said.

Since the outbreak of the coronavirus, the Bank of Japan has set up loan facilities for small businesses to deal with the crisis, while the government has expanded loan guarantee and interest subsidy programs. This fueled a record rush for cheap loans.

Any moderation in bad loan charges would reflect a trend seen around the world this earnings season, after banks in Singapore in the United States kept defaults at bay.

Bankruptcies fell 9.4% in the six months through September to 3,858 cases, the fewest since 1990, according to Tokyo Shoko Research. Still, there is a risk that more businesses will fail once virus-related support measures expire.

“It is too early for the costs of domestic credit to materialize,” said Rie Nishihara, analyst at JPMorgan Chase & Co.

Mizuho’s credit costs are likely to be lower than MUFG and Sumitomo Mitsui due to its smaller overseas exposure, according to Bloomberg Intelligence analysts Shin Tamura and Francis Chan.

Mizuho is expected to release his results for the three months ended September 30 on Thursday, followed by bigger rivals MUFG and Sumitomo Mitsui on Friday.

The banking groups were also helped in the last quarter by a solid performance in their brokerage activities. Each of their securities units recorded strong year-over-year profit growth, thanks to a pickup in business and personal activity.

Another likely bright spot is the profit from offloading stocks and bonds. Nishihara said banks’ selling of strategic stocks likely accelerated in the last quarter, as Japanese stocks advanced. MUFG and Sumitomo Mitsui likely saw big gains on bond sales in their investment portfolios, Tamura and Chan wrote.

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