Dim revenue picture for Japanese mega banks

Fitch Ratings sees no major recovery in domestic earnings.

The agency also reports that Japan’s three mega banking groups, despite an unlikely short-term earnings recovery, are likely to be supported by robust liquidity, firm asset quality and strong capital buffer.

The Japanese mega banking groups are Sumitomo Mitsui Financial Group, Inc.; Mizuho Financial Group, Inc. and Mitsubishi UFJ Financial Group, Inc.

Fitch expects the mega banking sector's year-on-year net income growth to slow down considerably in 2013 as positive contribution from negative goodwill winds down at certain mega banks. Prolonged weakness of domestic stock prices is likely to result in write-offs of equity investment. Potential losses on large stock holdings could partly offset bond gains, adding further pressure to profitability.

Fitch does not expect a downgrade of the mega banks' 'A-' IDRs, based on its view that their Support Rating Floors ('A-') are likely to remain unchanged. This is due to the government's strong propensity to support the banks even if Japan's IDRs ('A+'/Negative) are downgraded by a notch.

Mega banks' VRs are likely to remain stable as their constant retained earnings should lead to stronger capital buffer. Fitch estimates the mega banks' aggregate Fitch Core Capital ratio to be around 9.4% at end-March 2013.

Credit risks should be manageable given the banks' modest risk profile. In the three years to end-March 2012, the ratio of risk-monitored loans/total loans has been 2.3% on average.

Fitch believes the mega banks will accelerate their overseas business expansion, albeit selectively, in the next two to three years. The agency will monitor the mega banks' risk appetite for the overseas business, as the search for higher returns without further enhancement in their capitalisation or adequate risk-control strategies could lead to negative pressure on their VRs.

Also, the mega banks' future overseas strategy will be taken into Fitch's rating consideration as this could be one of the key factors to potentially affect their financial profile in the long term.

The mega banks are likely to continue substantial investment in Japanese government bonds, considering their abundant liquidity. Fitch estimates the mega banks' financial profile could manage a reasonable interest rate rise, given the modest durations of their bond portfolios.