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Japan Banks See Bad-Loan Costs at Decade-High $10 Billion

Bloomberg logoBloomberg 5/15/2020 Taiga Uranaka and Yuki Hagiwara

(Bloomberg) -- Japan’s top banks forecast the biggest bad-loan costs since the aftermath of the global financial crisis, joining other global lenders in bracing for the fallout from the coronavirus pandemic.

Total credit costs at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. will almost double to 1.1 trillion yen ($10.3 billion) in the year ending March 2021, the most in 11 years, the Tokyo-based lenders forecast Friday. They expect combined net income of 1.3 trillion yen, the lowest since the year ended March 2010.

“Credit costs are the biggest concern,” Mizuho Chief Executive Officer Tatsufumi Sakai told reporters in a teleconference.

Banks worldwide are setting aside billions of dollars to prepare for a wave of defaults as the coronavirus triggers potentially the worst global recession since the Great Depression. Interest-rate cuts around the world are compounding the misery for Japanese banks, which have been expanding loans abroad to make up for negative rates at home.

For years, the nation’s lenders have relied on low credit costs to prop up earnings as rock-bottom rates erode lending profitability. They have also been booking gains from sales of shares held in corporate clients -- something that’s becoming tougher after equity markets plunged this year. Shares of the three banks themselves have tumbled at least 29% this year to trade at about a third of their book values.

“I expect megabank stock prices to remain under downward pressure,” said Toyoki Sameshima, an analyst at SBI Securities Co. “It’s just impossible to determine whether their credit costs and other estimates are realistic or conservative, given how uncertain the outlook is in this unprecedented economic slowdown.”

a screenshot of a cell phone: Profit Gloom © Bloomberg Profit Gloom

MUFG, Japan’s biggest bank, expects profit to climb about 4% this year, mainly because it booked massive writedowns on its Southeast Asian units last fiscal year. Mizuho forecasts a 29% drop, while Sumitomo Mitsui sees its earnings sliding 43%. All projections are lower than analysts’ estimates.

The bleak outlook is increasing the impetus for cost cutting. Sumitomo Mitsui released a midterm business plan that involves reducing its headcount by 6,000 over the next three years through natural attrition, CEO Jun Ohta said. The bank has about 100,000 employees worldwide.

At the same time, Ohta said his bank will persist with its strategy of expanding abroad and is seeking acquisition opportunities.

MUFG will accelerate efforts to digitalize its operations as the coronavirus changes customer behavior, CEO Hironori Kamezawa said.

Bright Signs

One bright sign for investors is the lenders all pledged to maintain dividend payments in the current fiscal year. That confirmed analysts’ expectations even after some overseas rivals were forced to curb or withhold payouts at the behest of regulators.

Another is the prospect of Japan reopening parts of its economy as new virus cases decline. The government is lifting a state of emergency in most prefectures earlier than scheduled and will evaluate next week whether do the same in major cities including Tokyo, where nine new infections were found on Friday, according to broadcaster NTV.

Sakai said Mizuho’s projections were based on the assumption that the economy will bottom out by the end of the next quarter. Similarly, MUFG’s forecast was based on a slow U-shaped recovery beginning in the July-September period.

“To be honest, we don’t know whether credit costs are enough or not,” given the breadth of the Covid-19 crisis, Ohta said. “We would like to respond flexibly by watching the situation.”

Data next week is likely to confirm that Japan is in a deep recession, with analysts estimating the economy shrank an annualized 4.5% in the first three months of the year. Gross domestic product is expected to plunge 21.5% in the current quarter.

a screenshot of a cell phone: Sour Taste © Bloomberg Sour Taste

The banks are seeing strong loan demand, as businesses scramble to secure funding to weather the economic storm. Loans at major lenders grew the most since 2009 in April, Bank of Japan figures showed this week.

That may not be sustained because companies will have little incentive to spend during the slump.

“In the very short term, large corporates do have liquidity needs,” said Michael Makdad, an analyst at Morningstar Inc. in Tokyo. “You get a short-term boost, but after that things slow down.”

(Updates with MUFG CEO comment in the 10th paragraph. An earlier version was corrected to remove an erroneous reference to Sumitomo Mitsui increasing this year’s dividend)

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