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Earnings remain key weakness of Japanese banks: Fitch

Impact of rising interest rates in the US will be mixed, the ratings agency said.

Earnings and profitability remains a key weakness for Japanese banks, with recent shifts in business models taking time to bear positive fruit, reports Fitch Ratings.

The ratings agency has a neutral sector for Japanese banks in 2022. On the one hand, bank performance metrics are expected to remain steady, with the operating environment stable as the local economy gradually recovers from the pandemic. There is also a high probability that the Japanese government will support domestic systemically important banks.

“Fitch has not changed our view that the propensity of extraordinary government support to its systemically important banks is amongst the highest in the world,” the report said.

Despite improvements, earnings and profitability remain a key ratings weakness for Japanese banks – even for the megabanks despite their strong domestic franchises, Fitch said.

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“The mega banks have been focusing to control costs and to increase fee-based businesses. Lending business has shifted to relationship profitability based from transaction volume. We are seeing some improvement, but expect their shift in business model to sustainably improve profitability would take time, since many of its global peers have similar strategies,” it read.

Impact of the US interest rate rise will be mixed for Japanese lenders. On the other hand, revenue on lending would benefit from it. However, repricing of loan yields overseas and valuation losses on foreign bond holdings will reduce banks’ capital.

An Interest rate rise in Japan would be more positive for the banks' earnings given lower funding cost from abundant deposits. However, if this happens, asset quality could weaken, testing borrowers' repayment capability.

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