Japan’s top two banks expect record profits, announce big buybacks

By Makiko Yamazaki

TOKYO (Reuters) -Japan’s top two banks, Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG), announced big share buybacks on Tuesday, expecting record annual profits on healthy margins from lending in Japan and overseas.

The bullish outlook comes as Japan approaches an inflection point in its decades-long battle with deflation, paving the way for the Bank of Japan to phase out its ultra-easy monetary policy which for years depressed banks’ margins from lending.

“As we diversified revenue sources and reviewed cost structure to offset declining net interest income, our net operating profit has already recovered to levels before the BOJ’s negative interest rate policy was introduced (in 2016),” MUFG CEO Hironori Kamezawa told a briefing on Tuesday.

“I believe that the market is betting on an extra earnings boost from higher interest rates,” he said, as Tokyo’s benchmark index of banking stocks has been trading at 15-year highs.

MUFG said it would buy back up to 3.31% of its own shares worth 400 billion yen, while SMFG announced a buyback of 1.9% of shares worth 150 billion yen.

MUFG kept its full-year profit forecast at a record 1.3 trillion yen ($8.57 billion) after reporting a three-fold jump in second-quarter profit.

Meanwhile, SMFG raised its annual net profit forecast by 12% to 920 billion yen, exceeding the previous record set a decade ago and outpacing the 853 billion yen average analyst estimate.

A day earlier, smaller rival Mizuho Financial Group revised its annual net profit forecast to 640 billion yen ($4.22 billion), its highest in eight years.

Japanese banks continue to benefit from a recovery in economic activity at home, wider margins from lending in Japan and the United States and a weak yen that has boosted profits earned overseas.

The banks say a full earnings impact will only be felt after the BOJ ends its negative interest rate policy, but prospects of an end to the policy is prompting them to revise their strategy.

Mitsubishi and other big banks this month raised long-term deposit rates for the first time in about a decade as government bond yields crept up.

The moves underscore clear changes in the way the banks see deposits – from a source of pain to a potential revenue source because higher interest rates mean wider margins from lending based on their deposit base.

($1 = 151.6700 yen)

(Reporting by Makiko Yamazaki; Editing by Tom Hogue, Shri Navaratnam and Kim Coghill)