Japanese banks could maintain CET1 ratios of around 10%: Moody's

Capital accumulation could support credit profiles amidst weak profitability.

Moody's Japan K. K. says that the three mega bank groups in Japan can continue accumulating capital to support their credit profiles, because of the growth in their non-core income, despite their weak and deteriorating core profitability.

Moody's also says that the three groups — Mitsubishi UFJ Financial Group, Inc., Sumitomo Mitsui Financial Group, Inc. and Mizuho Financial Group, Inc. — should be able to maintain common equity Tier 1 (CET1) ratios of around 10%, excluding unrealized gains.

"SMFG has already achieved a 10% CET1 ratio, and MUFG is very close to meeting the same target," says Shunsaku Sato, a Moody's Vice President and Senior Credit Officer. "Mizuho will likely achieve the 10% by the end of the next fiscal year ending March 31, 2019."

"The megabanks have been able to build capital despite weak profitability, because their very low credit costs have resulted in most of their pre-provision income flowing to net income," adds Sato. "In addition, the banks' conservative dividend policies allow them to retain large proportions of their earnings."

Here's more from Moody's:

However the banks are unlikely to improve significantly their core pre-provision income (PPI), because deposits will continue to increase faster than loans, which will cause their returns on assets to decline.

Moody's therefore concludes that the banks' non-core sources of income — their stock gains and equity income from unconsolidated affiliates — are crucial to achieving their CET1 targets.

Moody's report also explains that ultra-low interest rates and excess liquidity in the system has had a severe impact on the banks' core profitability. Core PPI as a percentage of average assets fell by one-third to a half in the four years to the fiscal year ended March 31, 2017.