Japan’s largesse cuts big banks much-needed slack

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    HONG KONG- Japanese lenders are having a rough time, but it could be worse. Credit costs last quarter were lower than feared for the country’s three biggest institutions by assets – Mitsubishi UFJ, Sumitomo Mitsui Financial and Mizuho.

    That’s thanks to the government’s $3 trillion stimulus package starting to gain traction.

    The country’s commercial banks were wilting well before the pandemic hit.

    Too many small banks with too many branches in too many depopulating towns; too little technology investment; and negative sovereign interest rates to top it all off. The stock market has been merciless: The average lender in the Topix banking subindex trades at 0.2 times its book value. Over the past 12 months the average return on equity was barely over 2 percent, compared to 7.5 percent for the constituents of the Dow Jones US bank subindex, while total shareholder return was 17 percent in the red, Refinitiv Eikon data show. The government wants to consolidate them, but that is taking time.

    Meanwhile, the central bank is hardly able to contemplate anything resembling rate normalisation. Bankers’ net interest margins, currently averaging around 1 percent, are unlikely to improve. There’s talk of the Bank of Japan steepening the long end of the sovereign yield curve, and maybe widening the trading band for the 10-year bond. That’s nice for pensions and insurers but won’t help lenders much, as they mostly lend for shorter periods.

    Nevertheless, the quarter ending in December delivered some surprise upsides.

    The world’s third-largest economy has been contracting and deflating, yet it may have just touched bottom. Bankruptcies fell 21 percent last quarter to 1,751 from the same period in 2019, according to Tokyo Shoko Research. That probably helped Mitsubishi UFJ, the country’s largest bank by assets, exceed its profit forecast for the whole year in the nine months ending in December, and while its credit costs rose sharply to 344 billion yen ($3.3 billion), they were well shy of the 500 billion yen MUFG forecast for the year. It was a similar story on credit expenses for rival Mizuho, which logged a 19.4 percent profit boost in its third fiscal quarter.

    The government recently upped its GDP forecast for the next fiscal year to 4 percent in real terms. That won’t save lenders from their structural issues, but it could help extend last quarter’s relative respite.