Jan. 30 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc. fell the most since June in Tokyo trading after Japan’s second- largest bank by market value reported its first profit decline in six quarters.
The shares slid 5.5 percent, the biggest intraday drop since June, to 4,817 yen as of 12:35 p.m. local time. Sumitomo Mitsui was the second-worst performer on the Topix Banks index, which lost 3.6 percent today after the U.S. Federal Reserve trimmed its bond-purchase program. Net income fell 9.3 percent in the three months ended December from a year earlier, led by a bond-trading slump, an earnings statement showed yesterday.
Sumitomo Mitsui led banks in reducing Japanese government bond holdings last year as the central bank embarked on record asset purchases amid Prime Minister Shinzo Abe’s efforts to end deflation. Lending profit also fell last quarter and growth in fees and commissions slowed from the first half, casting a shadow over long-term earnings prospects, said David Threadgold, an analyst at Keefe Bruyette & Woods Inc. in Tokyo.
“I suspect there is an element of the earnings results” in the share decline, Threadgold said by phone today. “When we look at the key lines they have to carry the business over the long term, it’s not particularly a great picture.”
The bank reported 199 billion yen ($1.9 billion) in net income for the period, according to calculations based on the nine-month earnings statement. That compared with the 145.4 billion-yen average estimate of seven analysts surveyed by Bloomberg.
Income from trading government bonds and other securities fell 26 percent last quarter from a year earlier to 79.2 billion yen. Net interest income 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.
Japan’s equity-market rally continued to benefit Sumitomo Mitsui last quarter by boosting the value of its stock portfolio and sales of investment products. The rebound has stalled this year, with the Nikkei 225 Stock Average down more than 8 percent, the worst performance among developed markets.
Fees and commissions rose 7.6 percent last quarter to 242 billion yen, yesterday’s report showed. The company’s SMBC Nikko Securities Inc. unit reported an 8 percent increase in third- quarter profit to 13.2 billion yen as brokerage commissions and underwriting fees rose.
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.
Net income rose 28 percent to 704.7 billion yen for the nine months ended December, putting the bank on pace to achieve its full-year forecast of 750 billion yen. Analysts expect profit of 789.5 billion yen for the year ending March, according to the average of 19 estimates compiled by Bloomberg.
Mizuho Financial Group Inc., Japan’s third-largest bank by market value, is scheduled to post earnings tomorrow. 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 continued to cut bond holdings in the third quarter with an awareness of interest-rate risks,” Miki Murakami, a Tokyo-based analyst at Fitch Ratings Ltd., said by phone. “It no longer considers JGB investments as one of its sources of income.”
Still, 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 rebounds amid an economic recovery.
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.
“Loan margins still tend to go down in Japan and you can’t expect a change in direction for the time being,” Fitch’s Murakami said. “Sumitomo Mitsui may seek to incorporate more income from its brokerage and consumer-lending units.”
--Editors: Russell Ward, Teo Chian Wei