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One of Asia’s sleepiest investment sectors has outperformed tech stocks in the past year. Japanese lenders now have earnings to confirm the prescience of that rally.
The biggest groups posted record profits in the half year to September. They are nearing a short-term peak.
Earnings at Japan’s five biggest banking groups rose 56 per cent to a record of about ¥2tn ($13bn). The quintet consists of Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, Mizuho Financial, Sumitomo Mitsui Trust and Resona.
Margins on loans have been improving as spreads on loans to domestic corporations widened. Total assets have increased. Japan’s central bank tweaked yield curve control to allow long-term rates to rise higher than 1 per cent last month. Lenders have been cutting down on low-margin assets.
Shares of Mizuho and SMFG are up about 60 per cent in the past year. The stock of MUFG has outperformed too. It is up three-quarters. At 0.9 times tangible book, it is trading at nearly triple the levels of three years ago. A ¥400bn buyback this week has given an extra boost.
But the biggest driver of the rally has been rising hopes that the central bank may end its ultra-easy monetary policy soon.
If the Bank of Japan ends its negative interest rate, bank shares will make further gains. Each 1 percentage point increase in domestic interest rates equates to an earnings boost of about ¥3tn ($20bn) to local lenders, according to the bank’s estimates.
In the short term, the Federal Reserve will have a bigger impact on bank earnings than the BoJ. A large chunk of record earnings are thanks to US rate hikes, which have boosted income from overseas loans. As US inflation cools, investors are betting that further hikes are unlikely.
A local slowdown adds further risk to loan demand. Gross domestic product shrank at an annualised pace of 2.1 per cent in the third quarter, data showed on Wednesday, on falling business spending. For investors further gains from these stocks will now be scarce.
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