Japan bank shares rise 4 pct on Mizuho results

By Jonathan Soble

TOKYO, May 23 (Reuters) - Japanese bank shares rose 4 percent on Wednesday after an earnings report by Mizuho Financial Group (8411.T), the country's second-biggest lender, suggested higher interest rates were finally pushing up profits.

Sector share prices had slumped by a quarter since hitting a seven-year peak last April, as the Bank of Japan's first rate increase in more than half a decade failed to generate a predicted revenue surge.

Mizuho reported a narrower-than-expected 4.4 percent decline in annual net profit on Tuesday. Losses at a major borrower had forced it to boost reserves against a potential default, but the damage was smaller than forecast and was partly offset by a gain in lending income.

Crucially for investors, Mizuho said a tepid improvement in its lending margins had heated up in the second half.

The average spread between Mizuho's return on lending and the interest it pays depositors widened by 0.02 percentage point to over the full year, but grew by 0.06 percentage point in October-March compared with the previous second half.

"The fourth quarter was the strongest quarter of the year for each of operating revenues, net interest income and net fee income," Toyoki Sameshima, an analyst at Morgan Stanley, said in a note to clients.

Mizuho, which also announced a 43 percent hike in its dividend, said earnings would likely rebound by 21 percent this year.

Japanese lenders are looking to increase the portion of their earnings that they return to shareholders, currently around 10 percent, compared with about 20 percent on average at other Japanese companies and 30 to 40 percent at U.S. and European banks.

Mitsubishi UFJ Financial Group (MUFG) (8306.T), Japan's biggest bank, is likely to announce a 3,000-yen increase in its 2007/08 dividend to 14,000 yen when it reports annual earnings on Wednesday, the Nikkei business daily reported.

Shares in Mizuho ended the morning session up 5.5 percent at 847,000 yen, and MUFG's shares gained 3.7 percent. Third-ranked lender Sumitomo Mitsui Financial Group (SMFG) (8316.T) finished the morning up 4.5 percent.

The bank sector as a whole .IBNKS.T gained 3.73 percent, compared with a 0.41 percent rise in the benchmark Nikkei .N225.

Mizuho's earnings were helped by an extraordinary pension-related gain and the disposal of part of its large stock portfolio. Prospects for a sustained profit recovery, meanwhile, depend largely on the BOJ, said Shin Tamura, an analyst at UBS.

The central bank has raised its benchmark rate twice since last July to the current 0.5 percent, but limp consumer prices have undermined any case for more aggressive tightening.

"Given the risk of an earnings decline without the additional rate hike and stock sales, we think a genuine earnings recovery still looks doubtful," Tamura said.