Friday, May 15, 2009

Mizuho, Sumitomo Mitsui Forecast Return to Profit This Year

Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., Japan’s second- and third- largest banks by revenue, forecast a return to profit after posting $10 billion of combined losses in the past fiscal year.

Mizuho expects to earn 200 billion yen ($2.1 billion) in the 12 months through March 2010, while Sumitomo Mitsui forecast a 220 billion yen profit. They were joined by Aozora Bank Ltd. in predicting an end to deficits caused by bad loans and stock- market losses.

The three lenders forecast combined earnings of almost 1.1 trillion yen a year ago, only to have those estimates undone by sinking stock investments and Japan’s deepest postwar recession. Mizuho and Sumitomo Mitsui will struggle to meet their estimates, and probably post losses again this year as the slumping economy fuels rising bad loans, according to CLSA Asia-Pacific Markets.

“Loan-provision costs for banks almost always continue to rise even after the economy has bottomed,” Daniel Tabbush, a Bangkok-based analyst at CLSA, said by phone yesterday. Economic indicators continue to be “dire,” he said in a May 13 report.

Mizuho, Sumitomo Mitsui and Aozora yesterday booked 1.4 trillion yen in combined bad-loan charges for the year ended March 31, triple that of a year earlier, as the sagging economy and plunging exports fueled a 12 percent rise in bankruptcies among Japanese firms with debt exceeding 10 million yen.

Mizuho expects credit-related costs to decrease to 330 billion yen this year from 536.7 billion yen, while it forecasts a 50 billion yen gain on stock investments compared with a 400.3 billion yen loss last year, the bank said yesterday. Sumitomo Mitsui expects to book 380 billion yen in bad loan costs this year after boosting provisions in the year just ended, and logging 767.8 billion yen in charges.

Confidence Rises

Confidence among Japanese merchants rose to a 12-month high in April and industrial production rose for the first time in six months in March, signaling that the recession may be easing. The economy may grow at an annual 1.2 percent pace in the second quarter, according to economists surveyed by Bloomberg.

Gross domestic product contracted an annualized 16.1 percent in the three months ended March 31, following a fourth- quarter drop of 12.1 percent, according to the median estimate of economists surveyed by Bloomberg News.

Even as the economy may show signs of bottoming out by the end of the year, bad-loan costs may remain high, Katsunori Nagayasu, president of Mitsubishi UFJ Financial Group Inc.’s main bank unit, said last month.

That could force banks to raise more capital, according to Ismael Pili, a Tokyo-based analyst at Macquarie Group Ltd. Balance sheets at the nation’s biggest lenders, including Mizuho and Sumitomo Mitsui, are more vulnerable this year than last and less able to absorb loan losses, he said.


The three largest banks have already raised more than 2.4 trillion yen in funds since November as bad debts and investment losses depleted their capital. Mizuho said yesterday it may raise another 800 billion yen, including a 600 billion yen sale of common stock.

Sumitomo Mitsui’s decision this month to buy Citigroup Inc.’s Japanese brokerage Nikko Cordial Securities Inc. for 545 billion yen also leaves it in need of more capital, according to Macquarie’s Pili. The bank said April 9 it may raise as much as 800 billion yen in a common share sale, details of which haven’t been announced.

Mitsubishi UFJ, the nation’s largest lender, is scheduled to report earnings on May 19. The Tokyo-based company, which initially forecast net income of 640 billion yen for the year ended March 31, said May 1 it probably had a loss of 260 billion yen on soured investments.

Wall Street Ties

Japan’s largest banks are focusing on expanding fee- generating businesses by acquiring brokerage assets from Wall Street firms or allying with them, following investments last year in Morgan Stanley and Merrill Lynch & Co. Smaller rivals Aozora and Shinsei Bank Ltd. are in talks to merge after taking losses on investments in U.S. subprime-related assets, two people familiar with the plans said last month.

Lending by six so-called “city banks,” including Mitsubishi UFJ, Mizuho and Sumitomo Mitsui, rose by 5.2 percent to 195.5 trillion yen in the year ended March, the fastest pace in 18 years, the Japanese Bankers Association said in April. Companies turned to banks for funds after credit markets froze in the wake of Lehman Brothers Holdings Inc.’s bankruptcy.

Mizuho owned 2.6 trillion yen of shares at the end of March, while Sumitomo Mitsui’s banking unit held 2 trillion yen of stocks, underscoring the risk of another unprofitable year if markets decline. The Nikkei 225 Stock Average has gained 14 percent in the fiscal year started April 1, after falling 35 percent the previous 12 months.

Mizuho’s fiscal year loss was 588.8 billion yen while Sumitomo Mitsui’s deficit was 373.5 billion yen.