* Banks beat market profit forecasts on stock-driven rally
* MUFG tips profit down 4 pct, Mizuho, SMFG profits down
about 20 pct
* MUFG buoyed by overseas reach as domestic lending still
(Adds bond holdings, comment by analyst)
By Taiga Uranaka
TOKYO, May 14 Japan's three biggest banks beat
market forecasts with record annual profits, fuelled by a stock
market boom, but said earnings will fall this business year as
the glow of "Abenomics" fades and lending gains remain
Mitsubishi UFJ Financial Group Inc (MUFG) on
Wednesday forecast only a modest pullback in profit for the
business year that began in April, while the other two
"megabanks" expect double-digit declines.
Japan's biggest lender by assets will be buoyed by a greater
overseas reach than the other two - Mizuho Financial Group Inc
and third-biggest lender Sumitomo Mitsui Financial
Group Inc (SMFG).
The divergence underscores the difficulty facing banks 17
months after Prime Minister Shinzo Abe took office on a pledge
to end 15 years of deflation with loose-money stimulus policies.
"The Abenomics effect - rises in stock prices driven by low
interest rates - comes first," Mizuho President Yasuhiro Sato
told reporters. "The link to increased funding demand comes from
MUFG said net profit rose 15.5 percent last business year to
984.8 billion yen ($9.63 billion), above the 944.1 billion yen
mean estimate of 19 analysts polled by Thomson Reuters.
But for this year, MUFG - which owns about onefifth of
Morgan Stanley - expects profit to slip 3.5 percent to
950 billion yen, still above the analyst forecast of 907.6
Mizuho's net climbed 23 percent to 688.42 billion yen,
beating the analyst estimate of 664 billion yen. The bank
expects profit to fall 20 percent this business year to 550
billion yen, near the market estimate of 558.2 billion yen.
SMFG booked a 5.2 percent profit rise to 835.36 billion yen,
above the 799.8 billion yen consensus, but expects a pullback of
19 percent to 680 billion yen, near the market view of 689.7
NOW FOR THE HARD PART
The profit increases were propelled by factors that do not
look likely to repeat. Japan's Nikkei 225 Stock Average
rose 20 percent in the last fiscal year, boosting the value of
the megabanks' massive shareholdings and the commission revenues
at their brokerage subsidiaries.
The market is off 3 percent so far this business year as
investors grow impatient that Abe will introduce the hard
structural reforms to the word's third-biggest economy that are
considered essential for sustainable growth.
Last business year also saw the banks cutting their bad-loan
costs as the improving economy reduced the number of delinquent
"It remains uncertain how much the banks can increase
profits from their core lending activities," said Chikako
Horiuchi, a credit analyst at Fitch Ratings in Hong Kong.
"Loan spreads remain thin and volume is unlikely to increase
strongly enough to make up for it," she said. "Japan's corporate
sector is cash-rich, so capital investment by business clients
is unlikely to lead to a jump in loan demand anytime soon."
Loan balances ticked up 1 to 2 percent at the three banks
last business year but returns continued to fall amid intense
competition among the lenders. For example, the spread between
the interest rate SMFG charges on loans and pays for deposits
narrowed by 12 basis points to 1.37 percentage points.
The Bank of Japan launched a massive asset-buying programme
in April 2013 in a bid to end 15 years of deflation and to spur
banks into shifting from low-yielding Japanese government bonds
into more aggressive lending.
MUFG cut its JGB holdings by 8 trillion yen last business
year to 40.4 trillion yen. But the bank and the two rivals said
they are simply parking the bulk of the proceeds with the
central bank in the absence of borrowers.
MUFG, which aspires to be a top 10 U.S. bank by 2016, paid
about $5 billion in December for 72 percent of Thailand's Bank
of Ayudhya , adding 2 trillion yen to MUFG's overseas
The purchase will start boosting MUFG's profit in earnest
this year, said analyst Nana Otsuki at Merrill Lynch Japan
Securities before the results. Considering the profit relative
to the amount of capital, however, MUFG's advantage is not
particularly strong, Otsuki said.
($1=102.2250 Japanese yen)
(Editing by Christopher Cushing, William Mallard and Greg