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February 3, 2014 12:20 pm
Anyone who wants to get involved in profitless lending can just hand their best friend a 20. Hence the limited appeal of Japan’s deposit-rich megabanks. Low, and falling, interest rates have long crushed loan profits. But mix Japan’s resurgent economy with banks’ solid capital and those deposits should blossom at last – if only lending margins would budge.
Mitsubishi UFJ Financial Group, the most mega of the megabanks by assets, just reported expectation-smashing third-quarter profits. Net income of Y255bn was about a fifth more than expected and puts the group 86 per cent of the way to its full-year target. Megabank bulls will take comfort from a 12 per cent rise in net interest income. But MUFG’s higher profits resulted more from higher fee revenue and Japan’s soaring stock market than from improving loan margins.
The rise in fee-generating activity and the rally suggest confidence and could presage more lending. For now, though, profits remain muted. Net interest margins slipped 3 basis points in the quarter to 1.15 percentage points, a record low.
In an ideal world, the megabanks would be poised to benefit from a pick-up in demand for credit among higher-margin, smaller Japanese business as the recovery builds. They would also gain from efforts to build a presence in emerging Asia, as local rivals feel the pinch from tighter US monetary policy. MUFG just completed its majority purchase of Bank of Ayudhya, Thailand’s fifth-biggest lender by assets. But ideal worlds feature neither emerging market jitters nor Thai political unrest. MUFG’s shares are down 13 per cent this year.
The good news is that about four-fifths of MUFG’s loan book is floating rate, leaving it poised for a rebound when margins do improve. Until then, however, it and the other megabanks will remain deposit-rich, loan-poor and unloved.
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