(Updates with JGB holdings in the 10th paragraph.)
Jan. 29 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, posted a 9.3 percent drop in third-quarter profit as a slump in bond trading overshadowed gains from stock holdings and fee income.
Net income fell to 199 billion yen ($1.9 billion) in the three months ended Dec. 31 from 219.4 billion yen a year earlier. Quarterly earnings were calculated by subtracting first-half profit from nine-month figures reported in a statement in Tokyo today. That compares with the 145.4 billion- yen average estimate of seven analysts surveyed by Bloomberg.
Sumitomo Mitsui led Japanese banks in reducing government bond holdings last year as the central bank embarked on record asset purchases as part of Prime Minister Shinzo Abe’s stimulus measures designed to end deflation. An economic recovery spurred lending and sparked a stock rally that increased the value of banks’ shareholdings and sales of investment products.
“Sumitomo Mitsui has been breaking out of the business model in which it counts on profit from JGB trading,” Rie Nishihara, a Tokyo-based senior analyst at Mizuho Securities Co., said before the results were released. “The stance became clearer in the third quarter.”
Income from trading government bonds and other securities fell 26 percent last quarter from a year earlier to 79.2 billion yen, according to calculations based on today’s statement. Lending profit slid 3.2 percent to 344.6 billion yen, underscoring banking unit President Takeshi Kunibe’s concern that loan margins are shrinking even as borrowing picks up.
Fees and commissions rose 7.6 percent to 242 billion yen. Sumitomo Mitsui had a 79.6 billion-yen gain from equity-related investments in the nine months ended December, compared with a 67.3 billion-yen loss a year earlier, the statement showed. Its SMBC Nikko Securities Inc. unit today reported an 8 percent increase in third-quarter profit to 13.2 billion yen as brokerage commissions and underwriting fees rose.
The bank maintained its profit forecast for the year ending March at 750 billion yen. Tokyo-based Sumitomo Mitsui raised the projection in November from 580 billion yen after posting record first-half earnings.
Shares of Sumitomo Mitsui closed 2.7 percent higher at 5,095 yen in Tokyo before the earnings were released. Their record 74 percent gain last year was the best performance among Japan’s three biggest banks and compared with the benchmark Topix index’s 51 percent increase.
Mizuho Financial Group Inc., the country’s third-largest bank by market value, is scheduled to release earnings on Jan. 31. Mitsubishi UFJ Financial Group Inc., the biggest, will report on Feb. 3.
Government bonds held by Sumitomo Mitsui’s main lending unit dropped 56 percent from March last year to 9.2 trillion yen at the end of December, according to the statement.
Japanese banks reduced their JGB holdings every month except one since April 2013, central bank data show. BOJ Governor Haruhiko Kuroda that month announced a plan to target 2 percent inflation with bond purchases, stoking concern that higher interest rates may erode the value of fixed-income securities. Lenders’ stockpiles of sovereign debt totaled 138.9 trillion yen in November, after peaking at a record 171 trillion yen in March 2012, according to the BOJ data.
Sumitomo Mitsui President Koichi Miyata said in an interview last month that the banking arm stopped selling JGBs after reaching the minimum it needs and that it may start buying again once returns increase.
The Bank of Japan’s monetary easing is keeping interest rates low, making loans less profitable even as borrowing recovers. At the same time, a decline in corporate bankruptcies means banks’ costs tied to bad debts are falling.
Sumitomo Mitsui had 29.9 billion yen of credit-related revenue in the nine months ended in Dec. 31, compared with 57.2 billion yen in costs a year earlier, today’s statement showed.
Loans at major banks climbed for a 13th month in December, and corporate demand for credit is the highest since April, Bank of Japan data show. The average net interest margin for the 86 lenders on the Topix Banks Index is 1.3 percent, the least in Asia, according to data compiled by Bloomberg.
“Lending is growing in Japan but loan margins are shrinking,” Kunibe, who is also chairman of the Japanese Bankers Association, said Jan. 16. “Lending income is unlikely to increase domestically. On the other hand, overseas loans are expected to keep expanding” on better margins, he said.
Sumitomo Mitsui’s loans outstanding abroad rose about 8 percent from a year earlier to $158 billion as of Dec. 31, according to the statement. Asia took the biggest chunk, making up about 40 percent, while 32 percent came from the Americas and the rest were in Europe, the Middle East and Africa.
--Editors: Russell Ward, Teo Chian Wei