Japan banks' profit declines to persist despite overseas expansion

Any gains overseas will not be able to equal the size of domestic assets.

The persistent low-interest rate environment and stiff competition from amongst fellow banks will continue to drag on the profitability of Japanese banks, further weighed down by shrinking overseas net interest margins, according to a report by Moody’s Investors Service.

The persistent low-interest rate environment, stiff competition, and shrinking overseas net interest margins are weighing down heavily on banks, who reported dismal results for the first six months of FY 2020.

In particular, Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), and Mizuho Financial Group net incomes plummeted by 6.3%, 8.6% and 19.9%, respectively compared to a year earlier. All three banks reported high credit costs for H1, which is expected to rise as the current ratios of non-performing loan remain unsustainably low and has stopped declining.

In a bid to boost profitability, the major banks have been expanding their portfolio overseas. However, any gains from overseas expansions is unlikely stop declines in profitability and in return on assets, because they won’t be able to equal the substantial asset size of domestic retail businesses.

The banks’ overseas expansions also drag on the their move to reduce costs, particularly for MUFG and SMFG. Expenses are already set to rise on the back of the banks’ growing technology investment and compliance-related expenses. As a result, the banks’ move to reduce costs will take some time to produce meaningful results.

Further weighing in is the increasing difficulty in making gains from US bonds as a result of falling US interest rates and the flattening of the US dollar yield curve.

“The megabanks' main banking subsidiaries reported a 13-fold YoY increase in aggregate gains from sales of bonds, which accounted for 32.8% of their operating income, as US dollar interest rates fell. However, the flattening of the US dollar yield curve will make it difficult to make such gains,” analysts Tetsuya Yamamoto, Atsushi Goto, Shunkasu Sato, and Graeme Knowd of Moody’s Investors Services noted in the report.