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PREVIEW-Top Japan banks' Q3 seen hurt by bonds sell-off, slow loan growth

Published 01/26/2011, 03:17 AM
Updated 01/26/2011, 03:19 AM

* Results: Jan 28 SMFG, Jan 31 Mizuho, Feb 3 MUFG

* Sequential profits falls seen due to smaller bond gains

* Lending activity at home remains sluggish

* Shares of banks have outperformed broad mkt since Nov.

By Taiga Uranaka

TOKYO, Jan 26 (Reuters) - Japan's top three banks are seen posting declines in sequential quarterly profits in the absence of previous hefty bond trading gains, and their outlook is also subdued due to a fragile economic recovery, putting pressure on them to accelerate their overseas expansions.

Stripped of the short-lived boost from bonds, they are faced with the same old problem of core lending activities remaining sluggish and interest margins being razor-thin, with households and businesses reluctant to borrow and spend in a weak economy.

"A combination of a fall in loan balances and falling margins means revenue from normal commercial bank operations is likely to continue to decline," said Brian Waterhouse, a senior analyst at CLSA Japanese equities division.

Mitsubishi UFJ Financial Group (MUFG) , the biggest Japan lender by assets, is expected to post a third-quarter net profit of 114.4 billion yen ($1.39 billion), up 50 percent from a year earlier, according to the average of forecasts by Citigroup Global Markets Japan and Credit Suisse.

The brokerages on average expect No.2 Mizuho Financial Group to more than double net profit to 93.3 billion yen, and No.3 Sumitomo Mitsui Financial Group to report a 94.2 billion net profit, down 24 percent.

Those figures would be roughly half of what the banks earned in July-September.

WEAK BOND MARKET

In October-December both U.S and Japanese government bond prices fell sharply as central banks loosened monetary policy, prompting a sell-off of bonds by Japanese banks, which had aggressively snapped them up as they struggled to find places to invest piles of cash from deposits by clients.

"Banks didn't expect large bond trading gains to continue in the second half. The bond market's direction has been in line with expectations," said Takehito Yamanaka, a senior analyst at MF Global FXA Securities.

"But market moves may have been sharper than some thought."

Net interest income, which is profits from lending activities and still accounts for the bulk of banks' earnings, is likely to keep shrinking at most lenders. Outstanding loans by Japanese banks fell 1.9 percent in December, down for the 13th straight month, Bank of Japan data shows.

But Yoshinobu Yamada, a senior analyst at Deutsche Securities, was among those relatively optimistic about the banks' performance in the latest quarter.

"I expect (quarter-to-quarter) profit falls to be smaller than anticipated," he said.

"The banks have been selling JGBs, but not to cut losses. Rather, I think they have still been making a profit and credit costs are likely to remain low due to the absence of large-scale bankruptcies."

Shares of Japanese banks have made a sharp rebound since November, with the sector index on the Tokyo Stock Exchange up more than 20 percent in the past three months, outperforming the benchmark Nikkei average . ($1=82.22 Yen) (Additional reporting by Arada Kultawanich in BANGKOK; Editing by Muralikumar Anantharaman)

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