Japan’s top banks forecast the biggest bad-loan costs since the aftermath of the global financial crisis, joining other global lenders in bracing for the fallout from coronavirus pandemic.
Total credit costs at Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. will almost double to $10.3 billion in the year ending March 2021, the most in 11 years. They expect combined net income of 1.3 trillion yen, the lowest since the year ended March 2010.
“Credit costs are the biggest concern,” Mizuho Chief Executive Officer Tatsufumi Sakai told reporters in a teleconference.
Banks worldwide are setting aside billions of dollars to prepare for a wave of defaults as the coronavirus triggers potentially the worst global recession since the Great Depression. Interest-rate cuts around the world are compounding the misery for Japanese banks, which have been expanding loans abroad to make up for negative rates at home.
For years, the nation’s lenders have relied on low credit costs to prop up earnings as rock-bottom rates erode lending profitability. They have also been booking gains from sales of shares held in corporate clients — something that’s becoming tougher after equity markets plunged this year. Shares of the three banks themselves have tumbled at least 29% this year to trade at about a third of their book values.
“I expect megabank stock prices to remain under downward pressure,” said Toyoki Sameshima, an analyst at SBI Securities Co. “It’s just impossible to determine whether their credit costs and other estimates are realistic or conservative, given how uncertain the outlook is in this unprecedented economic slowdown.”
MUFG, Japan’s biggest bank, expects profit to climb about 4% this year, mainly because it booked massive writedowns on its Southeast Asian units last fiscal year. Mizuho forecasts a 29% drop, while Sumitomo Mitsui sees its earnings sliding 43%. All projections are lower than analysts’ estimates.
The bleak outlook is increasing the impetus for cost cutting. Sumitomo Mitsui released a midterm business plan that involves reducing its headcount by 6,000 over the next three years through natural attrition, CEO Jun Ohta said. The bank has about 100,000 employees worldwide.
At the same time, Ohta said his bank will persist with its strategy of expanding abroad and is seeking acquisition opportunities.