Japanese banks' profitability still pressured by low interest rates

Tighter credit spread isn't helping, too.

Moody's Japan K.K. has said that the operating environment for Japanese banks remains stable despite diminished near-term expectations for real GDP growth.

According to a release from Moody's Investors Service, this comes as the depreciating yen has supported the equity markets and boosted exporters' profitability.

"Japanese banks' asset quality will continue to be robust in 2015, with the improved credit quality of large corporate borrowers a key factor," says Shunsaku Sato, a Moody's Vice President - Senior Credit Officer, in the just-released "2015 Outlook—Japan Banks".

"Larger corporate borrowers have shrunk leverage and grown cash balances, while the default rate among small- and medium sized enterprises is at a 15-year low."

Here's more from Moody's Investors Service:

Moody's says that funding and liquidity also remain credit strengths for Japanese banks, which have very low dependence on confidence-sensitive market funding.

Individuals' preference for deposits over other financial assets continues to mean that deposits are substantially larger than bank loans, says the rating agency.

However, Japanese bank profitability, already low compared to global peers, remains pressured by low interest rates and ever-tighter credit spreads.

Rising fee income due to increased sales of investment products is insufficient to offset the narrowing of net interest margins, says Moody's.

As a result, mega-banks have expanded overseas to boost profitability, although this expansion will continue to pose unfamiliar risks, says the rating agency.

Profit-seeking has also led regional banks to form alliances to share IT investment costs and to seek top-line synergies, notes Moody's.

Finally, Moody's expects that unlike a number of other banking systems, the level of systemic support for Japanese banks will remain unchanged in 2015.

Financial stability remains a key issue for the government which, still cognizant of the effects of the Japanese financial crisis in the late 1990s, considers pre-emptive capital injections into solvent banks as the lowest-cost method for maintaining financial stability.