Japan’s Dwindling Loan Risk Cushions Sumitomo Mitsui Profit

Jul 30, 2014 9:16 pm ET

(Updates with today’s shares in the fifth paragraph.)

July 31 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc. posted a smaller-than-estimated drop in first-quarter profit as borrowers’ improving financial health allowed the company to put aside less funds for defaults.

Net income fell 20 percent from a year earlier to 230.8 billion yen ($2.3 billion) in the three months ended June 30, Japan’s second-biggest bank by market value said yesterday. That beat the 180 billion-yen average estimate of five analysts surveyed. Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. will probably report lower profit today.

Sumitomo Mitsui’s fee income declined as investment-trust sales slid from last year, when Prime Minister Shinzo Abe’s economic stimulus measures fueled demand for stocks that’s now waning. While Japan’s biggest banks increased loans over the past 19 months, margins are narrowing as interest rates fall.

“The result wasn’t as bad as expected, considering the backlash in the markets,” Miki Murakami, a Tokyo-based analyst at Fitch Ratings Ltd., said by phone yesterday. “The bank’s loan portfolio became healthier amid the economic recovery. At the same time, it’ll take time for funding demand to rise.”

Shares of Sumitomo Mitsui rose 2.8 percent to 4,308 yen at 10:10 a.m. in Tokyo, paring this year’s decline to 21 percent. The Tokyo-based bank kept its profit forecast of 680 billion yen for the year ending March.

Mitsubishi UFJ, Japan’s biggest publicly traded bank, will probably report a 17 percent decline in first-quarter profit, according to analysts’ estimates. Mizuho, the third largest by market value, may say earnings fell 45 percent.

Market Slowdown

Sumitomo Mitsui had a net reversal of loan-loss provisions of 25.2 billion yen, almost triple from a year earlier. Non- performing loans made up 1.7 percent of lending as of June, down from 2.2 percent a year earlier, according to an earnings presentation.

Fees and commissions income fell 13 percent to 218.9 billion yen. The lender’s SMBC Nikko Securities Inc. unit contributed to the drop, posting a 63 percent decline in profit to 9.8 billion yen as investors traded fewer stocks.

The Nikkei 225 Stock Average has lost 3.3 percent this year after surging 57 percent to a six-year high in 2013. The gauge rose 0.7 percent this morning.

Nomura Holdings Inc. and Daiwa Securities Group Inc., Japan’s biggest investment banks, this week reported lower quarterly profit due to slumping brokerage commissions. The average daily trading volume on the Tokyo Stock Exchange’s first section fell 51 percent last quarter from a year earlier.

Losing Steam

Gains from Sumitomo Mitsui’s equity-related investments decreased to 32.7 billion yen last quarter from 56.1 billion yen a year earlier. Bond and securities trading income slid 33 percent to 50.6 billion yen.

“The capital market wasn’t great, and that’s the biggest difference from last year,” Nobuyuki Hirano, chairman of the Japanese Bankers Association and president of Mitsubishi UFJ, said last month.

Japan’s economic recovery is losing steam following a sales-tax increase in April that prompted consumers to cut spending and manufacturers to pare output. Industrial production tumbled the most in June since a March 2011 earthquake. The Cabinet Office this month cut its growth forecast for this fiscal year to 1.2 percent from 1.4 percent.

Interest Income

Net interest income, or revenue from lending minus payments on deposits, slipped 1.3 percent last quarter to 394.6 billion yen, Sumitomo Mitsui said.

Bank of Japan figures show loans at major banks grew every month since December 2012, when Abe was elected on a platform of fiscal spending, monetary easing and economic restructuring. At the same time, bond buying by the central bank to end deflation has lowered borrowing costs, eroding loan profitability.

The gap between deposit and lending rates at Sumitomo Mitsui’s main banking unit fell to 1.32 percent last quarter from 1.4 percent a year earlier, yesterday’s statement showed.

“Domestic lending remains weak, with the margin narrowing further,” said Rie Nishihara, a Tokyo-based senior analyst at Mizuho Securities Co. “Banks are losing the tailwind of Abenomics.”