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Finance

Japan megabanks brace as a resurgent COVID haunts economy

Lenders see opportunities in industrial reorganization and climate change

The average loan rate at Japan's major banks fell from 0.6% in March to 0.3% in May, and stood at 0.4 to 0.5% in July-August.

TOKYO -- Major Japanese banks are bracing for a tough time ahead after dealing with the coronavirus pandemic relatively well in the April-September half.

But they find themselves fighting through headwinds. The economic recovery from a deep slump in April and May has been slower than bankers had hoped. And this problem has been compounded by a fresh wave of coronavirus infections. Meanwhile, interest margins have been further eroded by the government's offer of interest-free loans.

"Economic recovery has been slower than expected," said Tatsufumi Sakai, president and CEO of Mizuho Financial Group, Japan's third largest financial holding company. "There is a risk of a new wave of infections. We will have to be more vigilant (about bad loans) going forward."

Sakai spoke on Thursday while delivering his group's first-half earnings report.

Mizuho has raised its estimate for the group's core profit for the year ending March to 710 billion yen ($6.8 billion), up 11% on the year, but it added that loan loss provisions and valuation losses on its stock holdings are expected to leave net profit down 22% at 350 billion yen.

Credit conditions in Japan were surprisingly benign in the April-September half. The number of bankruptcies fell to their lowest point in 30 years for the April-September period, according to Tokyo Shoko Research, thanks to vigorous credit support from the government and Bank of Japan. The government has offered zero-interest loans and credit guarantees to small businesses, while the BOJ has provided interest-free funding for banks making loans to struggling businesses.

This support lifted the balance of bank loans to 573.7 trillion yen as of August, an all-time high, BOJ data shows.

But it has also depressed lending rates that have been at rock-bottom levels since 2016, when negative interest rates were introduced, putting more pressure on banks' interest revenue. BOJ data also shows that average loan rates at major banks fell from 0.6% in March to 0.3% in May and stood at 0.4 to 0.5% in July-August.

With a slow-moving recovery and resurgent virus, Mizuho predicts Japan's economy will not manage to climb back to where it was before the crisis until the end of 2022, instead of the end of 2021.

Sumitomo Mitsui Financial Group CEO Jun Ota also says that Japan's current benign bankruptcy situation could actually be something of a time bomb. He said that credit costs were merely being pushed back to the fiscal second half or to the next fiscal year.

"There were not as many bankruptcies as I had anticipated in the fiscal first half, but there are many borrowers with potential risks," Ota said. "Whether credit costs will show up in the second half or in the next fiscal year, it is hard to tell."

According to Mizuho's Sakai, "polarization is progressing between industries as well as within each industry."

He was talking about the pandemic's knack for creating and decimating profits. Some sectors, like information technology and online games, have become famously profitable as people work and study from home, while the apparel, hotel and tourism industries suffer. Within each sector, there are also big winners and losers. Automaker Toyota, for example, has posted record sales and Nissan record losses.

Business conditions remain tough for restaurants, gasoline stations, travel agencies, karaoke houses, department stores, business attire retailers and shoemakers, as more people work from home and do their shopping online, according to Tokyo Shoko Research.

Mizuho is now in a defensive mode. Its balance of overseas loans, a key growth area, was down by 5%, to 24.9 trillion yen, as of the end of September, marking the first decline in two and a half years.

At Mizuho, net profit slowed to 932 million yen in July-September from 1.22 billion yen in April-June, as credit costs increased to 422 million yen from 390 million yen.

At Mitsubishi UFJ Financial Group, the nation's largest banking group, net profit for July-September came to 217 billion yen against 183 billion yen in April-June. At Sumitomo Mitsui Financial Group, the second largest, net profit came to 184 billion yen versus 86 billion yen.

"We do what we can on our own rather than wait for economic recovery," Mizuho's Sakai said, referring to efforts to shut branches, reduce payroll and help borrowers adapt to the new normal and to the global shift to a green economy and tighter emissions controls."

Sumitomo Mitsui's Ota said that his group was ready for another wave of the pandemic. "We have experienced many remote meetings and online seminars. If there is another wave of the pandemic, our sales activity will not be severely impacted. We have also improved infrastructure for remote operations, such as providing employees with personal computers," he said.

"But some business transactions, such as mergers and acquisitions, are hard to complete without face-to-face meetings. They will be impacted."

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