Fitch: Japan's mega banks' profit growth uncertain

Lenders had anemic recovery despite large common stock issuance that boosted their core capitalisation.

Fitch Ratings said in a new comment that the annual results (FYE10, end-March 2010) of three Japanese "mega" banking groups -- Mizuho Financial Group (Mizuho, 'A'/Stable), Sumitomo Mitsui Financial Group (SMFG, 'A'/Stable), and Mitsubishi UFJ Financial Group (MUFG) -- showed an anemic recovery from FY09, but profitability remained weak, according to a Fitch Ratings report.

SMFG maintained the highest profitability (in terms of return on assets or ROA) among the three mega banking groups, despite net losses at its subsidiaries. MUFG's profitability was dragged down mainly by the performance of some of its subsidiaries including ACOM CO., LTD. ('A-'/Stable). For Mizuho, the low profitability of Mizuho Bank ('A'/Stable), one of the group's major banking subsidiaries, lowered the group's overall profitability.

Thanks to their large common stock issuance, the core capitalisation of Japanese mega banks improved significantly in FYE10. Based on Fitch estimates of core capital ratios (deducting preferred stock, preferred securities, net deferred-tax assets, intangible assets and other non-loss-absorbing capital from reported equity), SMFG's core capital ratio was about 7% and MUFG's was at 8% as at end-March 2010. Mizuho's core ratio will improve to 5.6% from 4.2% at end-March 2010 -- if it succeeds in issuing a maximum JPY800bn of common shares as registered on 14 May 2010.

The FYE11 forecasts for SMFG and MUFG are modest, whereas Mizuho expects the group's net profits to rise by 80% annually, though Fitch notes that this is growth from a low base in FYE10. Fitch expects the mega banks' revenue growth from core banking operations to remain constrained in the medium term due to weak loan demand and the agency's expectation that interest margins will stay low; however, Fitch notes it may be possible for some of the non-banking businesses to contribute to an improvement in the banks' profitability.