TOKYO -- Combined net profit at Japan's five leading banking groups rose for the first time in four years in the April-September half, but the results were largely inflated by capital gains and other one-time boosts that concealed lackluster core operations.
Although aggregate net profit for the first half grew 10% on the year to 1.53 trillion yen ($13.4 billion), net operating profit from lending, financial product sales and other banking operations declined for the third straight year, plunging 28%.
"These are harsh earnings propped up by one-off gains," admitted Nobuyuki Hirano, president and CEO of Mitsubishi UFJ Financial Group. Its net profit for the half effectively was a record, given that the previous interim record, marked in fiscal 2011, was a result of booking negative goodwill for its investment in Morgan Stanley.
Yet net operating profit actually fell 3% on the year to 700.7 billion yen on a consolidated basis. And even "those results are puffed up compared to reality," noted Hirano. "The profit would have sunk 8% without exchange rate effects."
Core operations are under stress at other banking groups as well. Net operating profit fell at the subsidiary banks in the five banking groups, reaching 1.11 trillion yen.
At Mizuho Financial Group, combined net operating profit at Mizuho Bank and Mizuho Trust & Banking nosedived 41%. "We must take drastic measures to improve our earnings power and cost structure," said Yasuhiro Sato, president and CEO of the Mizuho group.
The culprit behind weak earnings is shrinking margins from low interest rates. The average spread between domestic lending and deposit interest rates was 0.84%, 0.37 percentage points lower than five years ago. Revenue from commission and fees was also weak due to slow sales of insurance, trusts and other financial products.
The sale of cross-held shares has helped fill in the hole, with proceeds climbing 64% on the year to an aggregate 234.1 billion yen.
Improved earnings at borrowers have enabled the banks to pare down loan-loss reserves, adding a combined 260 billion yen to profit, roughly triple the figure from a year earlier.
"We must prioritize non-interest revenue, group projects and overseas operations," said Takeshi Kunibe, CEO of Sumitomo Mitsui Financial Group, at the company's earnings announcement Tuesday.
Mitsubishi UFJ and Sumitomo Mitsui each achieved two-thirds of their earnings goals for the year ending March during the first half, but both banks kept their full-year forecast unchanged.