Mitsubishi UFJ Weathers Japan Slowdown With Lending Abroad

Jul 31, 2014 10:12 pm ET

(Updates shares in the ninth paragraph.)

Aug. 1 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc.’s overseas expansion is paying off as loan growth abroad helps to limit declining profit stemming from Japan’s equity-market slowdown and weakening economy.

Japan’s biggest bank yesterday posted a smaller drop in first-quarter earnings than analysts had estimated as lending profit and fees rose. Net income fell 5.8 percent to 240.5 billion yen ($2.3 billion) in the three months ended June, the lender said in a statement.

Mitsubishi UFJ’s overseas loans surged 25 percent from a year earlier, buoyed by its $5 billion acquisition of Thailand’s Bank of Ayudhya Pcl in December. While the country’s other largest banks, Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., also reported a smaller drop in profit than analysts had anticipated, their lending income fell.

“Banks are having a hard time trying to increase domestic loan volumes and widen margins, so overseas lending is offsetting that,” Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA, said by phone yesterday. “For Mitsubishi UFJ, Bank of Ayudhya contributed to its solid earnings.”

Mizuho, Japan’s third-biggest lender by market value, said yesterday that first-quarter profit decreased 38 percent from a year earlier to 154.7 billion yen. Sumitomo Mitsui’s net income fell 20 percent to 230.8 billion yen, the second-largest bank reported on July 30.

‘Expected Worse’

Profit at Mitsubishi UFJ exceeded the average 212.2 billion-yen estimate of six analysts surveyed by Bloomberg. Mizuho’s result surpassed analysts’ projections for 135.4 billion yen and Sumitomo Mitsui’s beat the 180 billion-yen average estimate. All three Tokyo-based banks maintained their full-year profit targets.

“I expected worse results,” said Naoko Nemoto, managing director of financial institutions ratings at Standard & Poor’s in Tokyo. “The banks are likely to achieve their full-year targets, but without special factors, such as the market-related gains they had in the past year, they need broader credit demand to bolster profit.”

Combined profit at the three so-called megabanks climbed to a record last year, when Prime Minister Shinzo Abe’s economic stimulus measures fueled a stock rally that spurred fees from sales of investment products and increased the value of their own equity holdings.

Shares Fall

Shares of Mitsubishi UFJ fell 0.6 percent to 612 yen at 11:06 a.m. in Tokyo, and Mizuho dropped 0.9 percent. The Nikkei 225 Stock Average slid 0.3 percent, taking this year’s decline to 4.4 percent after ending 2013 at a six-year high. Shares of the three banks have all declined at least 11 percent this year, with Sumitomo Mitsui tumbling the most.

Mitsubishi UFJ’s net interest income, or revenue from lending minus payments on deposits, rose 11 percent last quarter from a year earlier to 490.7 billion yen. Mizuho’s lending income fell 4 percent and Sumitomo Mitsui’s slipped 1.3 percent.

Japanese banks are struggling to boost profit from domestic lending as interest rates decline amid unprecedented bond buying by the central bank to end deflation. Nineteen straight months of loan expansion at the largest lenders have been negated by the lowest net interest margins in Asia.

“It’s worrisome that domestic lending isn’t increasing much while loan spreads keep falling,” said S&P’s Nemoto. “I don’t see much of a positive impact from Abenomics there. The banks need to rely on overseas income as profit at home isn’t rising.”

Overseas Loans

Mitsubishi UFJ had 33.9 trillion yen in overseas loans in June, out of a total portfolio of 102 trillion yen, yesterday’s earnings presentation showed. The company’s purchase of a controlling stake in Bank of Ayudhya last year was its largest acquisition in Asia outside of Japan.

Stock trading volume has receded this year as investors grow wary that Abe’s policies of fiscal spending, monetary easing and restructuring will deliver a sustainable economic recovery. Household spending fell in June and industrial production dropped the most since a March 2011 earthquake.

Mitsubishi UFJ was the only megabank last quarter to increase fees and commissions, which rose 5.1 percent from a year earlier to 284.5 billion yen.

“The flagging market dragged down banks’ earnings,” said Ken Takamiya, a Tokyo-based analyst at Nomura Securities Co. “You can’t blame them. Last year was too good.”