Profits of Japan’s top three banks in peril

Sales of extremely risky Japanese Government Bonds push profits of Japan’s three largest banks to a record high.

Lending, the core business of any bank, remained weak for Japan’s top three. The combined net profits of Mitsubishi UFJ Financial Group Inc.; Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc., however, totaled some US$25 billion, the largest since the global financial crisis began in 2008.

MUFG, Japan's largest bank by assets and market capital, said net profit jumped 68% to US$12.2 billion on lower credit costs, large gains from bond trading and a one-time gain from the conversion of its preferred shares in Morgan Stanley into common shares.

Sumitomo Mitsui and Mizuho Financial reported gains in net profit of 9% and 17% to US$6.5 billion and US$6.0 billion, respectively.

Analysts said, however, that net profit for all three is likely to fall in the current fiscal year. MUFG and SMFG agreed with this estimate and said they expect net profit to fall about 30% and 7%, respectively. All three lenders expect a sharp drop in gains from bond trading.

The three banks JGB holdings amount to some US$1.25 trillion and gains from JGB sales by the banking units of MUFG, SMFG and Mizuho in the last fiscal year came to a combined US$7.1 billion.

The short-term danger from JGBs is that the government’s debt load is about twice the size of its economy, a ratio that exceeds even that of Greece.

Also, its population is rapidly aging, which places even more stress on public finances. The government is trying to reduce its massive deficit through a proposal to double the sales tax.

While they don't see their huge JGB holdings as a short-term risk, the top three admit they need to be better positioned in the longer term in case Japanese interest rates rise.