Japanese mega banks' earnings dampened by regional exposure

Profit dropped in the past months.

According to SNL Financial, earnings at Japan's three megabanks likely declined in the six months to September from a year earlier as economic slowdowns in emerging markets in Asia had spillover effects on their loan books and gains from securities trading shrank.

The trio, Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc., probably boosted provisions for loans in Southeast Asia, which all three are substantially exposed to, as the region bears the brunt of a slowdown in heavyweight trading partner China. Sliding prices for oil and other commodities have also made companies in those sectors vulnerable, and the Japanese lenders likely set aside more funds against credit extended to such overseas borrowers.

Here's more from SNL Financial:

The impact of higher credit costs on their bottom lines for the fiscal first half would be particularly profound as all three of them booked provision reversals for the same period of 2014. On the other hand, economic weakness means slow growth in overseas loans, which are becoming an increasingly important revenue source for the three largest banks in Japan as domestic credit demand remains anemic, analysts said.

"There is a lot of downside risk internationally," David Threadgold, a Tokyo-based analyst at Keefe, Bruyette & Woods, told SNL Financial. "Credit costs internationally were up significantly in the first half of this fiscal year, though significant credit reserve releases were a positive contribution" 12 months earlier.

Making matters worse for the three banks, trading income may have decreased amid volatility in prices for both domestic bonds and stocks during the six-month period. Also, in the previous year, a weaker Japanese yen increased the value of gains from trading in foreign securities, an extra boost that was likely absent in first half of the year ending in March 2016, as the foreign exchange rate was relatively stable.

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