Japan’s leading banking groups are poised to announce a historic combined net profit of approximately 3 trillion yen ($19.3 billion) for the fiscal year ending in March 2024. This surge in profitability, representing a 20% increase from the previous year, is attributed to higher interest rates abroad, which have bolstered margins on lending activities.
The projected profit level would mark the highest recorded since the consolidation of Japan’s banking industry into the top three players in fiscal 2005. Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group are set to unveil their full-year earnings on Wednesday, surpassing previous profit estimates totaling 2.86 trillion yen.
Comparatively, the most substantial profit achieved by the three banking giants to date was approximately 2.5 trillion yen for the fiscal year ended March 2014. In response to the ongoing challenge of low interest rates dampening earnings, these institutions have strategically streamlined their branch networks and intensified efforts to enhance earnings from corporate lending activities. This fiscal year would mark the fourth consecutive year of profit growth since the period ending March 2021.
The recent uptick in U.S. interest rates has notably improved interest margins on overseas operations. With the U.S. Federal Reserve implementing rate hikes, the spread between lending rates and borrowing costs has widened, resulting in heightened interest income for the Japanese banks. Additionally, the depreciation of the yen against other currencies has further contributed to bolstering yen-denominated revenues earned on foreign currencies.
Despite the optimistic outlook on profits, concerns remain regarding the sustainability of this robust earnings performance. As one bank executive cautioned, “Profits appear stronger than actual earnings power,” signaling a need for prudent evaluation amidst potential economic fluctuations.
Fueled by solid profitability, domestic companies continue to exhibit robust borrowing demand. Notably, capital spending has surged, driven by initiatives aimed at enhancing business efficiency and promoting decarbonization. Moreover, the uptick in funding requirements stems from heightened activity in mergers and acquisitions, with 2023 witnessing a five-year high in M&A activity totaling approximately 23 trillion yen, marking a substantial 47% increase from the previous year, according to LSEG data.
While the Bank of Japan ceased its negative interest rate policy in March, the full impact of higher domestic lending rates on bank earnings is not expected to materialize until at least the fiscal year ending in March 2025. However, with the prospect of further interest rate hikes on the horizon, Japanese banks stand to benefit from an additional tailwind to support business activities.
