TOKYO -- The Bank of Japan's negative-rate policy will squeeze profits at the three Japanese megabanks by at least 300 billion yen ($2.96 billion) or so in the current fiscal year ending next March, government estimates show.
A survey by the Financial Services Agency focused on how negative interest rates impact interest income, derivatives trading, and such retail transactions as sales of asset management products at the three megabanks. Mitsubishi UFJ Financial Group's profit will fall by 155 billion yen, Sumitomo Mitsui Financial Group will lose between 75 billion yen and 76 billion yen in black ink, and Mizuho Financial Group's profit will retreat by 61 billion yen, the results showed. Narrower interest rate spreads are the chief culprit.
Based on its findings, the financial watchdog expressed concerns to the BOJ that the banks will lose lending leeway. BOJ board members will likely discuss the results as part of a comprehensive assessment of the minus-rate policy when they meet next month.
If the BOJ decides to take rates further into negative territory, the banks said they would suffer additional declines in interest income of 48 billion yen, 41 billion yen and 60 billion yen, respectively.
The FSA had urged cooperation from the financial sector on negative rates, but now the watchdog is adopting a guarded stance toward any ratcheting up of the policy in light of the findings, which were worse than expected.
When a bank expands services such as loans in order to boost earnings, that hit to the capital base has to be compensated for. However, the three megabanks have engaged in massive fundraising efforts since the global financial crisis, and any further public stock offerings would likely face resistance from investors.
If the megabanks continue to shrink their holdings of risk assets in order to shore up their capital bases, the list of eligible borrowers might shrink.
The FSA survey also examined the financial institutions' health. At one bank, profitability has crumbled for home loans with 0.625% annual interest rates, and the banking unit has fallen into the red.
Meanwhile, for insurance companies, it is difficult to judge how the negative-rate policy will impact earnings in the short term since those providers engage in long-term fund management. But based on the fluctuating market values of long-term Japanese government bonds and similar vehicles, there is at least one insurer that saw its capital ratio fall by half over a year.