Japanese banks profit erosion slow amidst policy reforms

Liquidity in the bond market is boosting earnings outlook.

A mild reprieve is in sight for Japan’s embattled banks as the steady decline in earnings are expected to slow down as interest rates on existing loans and new loans narrow with the stabilisation of market rates, according to Moody’s Investors Service. 

A number of policy reforms by the central bank to create liquidity and increase volatility in the government bond market is also set to ease pressure on profitability.

Also read: Can going overseas salvage struggling Japanese banks?

Japanese banks have long been struggling against crippling business conditions against an ultra-low interest rate environment engineered by the Bank of Japan and declining profit from loans as the country rapidly ages ahead of its peers.

The United Nations expects the proportion of the Japanese population aged 65 and above to account for a third of the population by 2030 which would give Japan the distinction as the oldest country in the world.

A rapidly ageing country presents a challenge to banks as retirees tend to draw down in savings and less risky investment products unlike younger populations that use more expensive banking products.

Also read: Mizuho taps on Japan's wealthy elderly to boost dismal lending

“Falling loan demand and a shift toward lower-risk deposits are pressuring the profitability and growth prospects of banks, and Japan's three megabanks have announced structural overhauls that will result in a reduction of their headcount by 32,000,” Moody’s said in a previous report. 

However, the ultra-low interest rate bodes well for asset quality which is expected to remain strong in the near term in addition to strong capital positions.

“Capital ratios will remain largely stable, sustaining recent years' gains. Given a lack of strong loan growth, internal capital generation, as weak as it will be, will be sufficient to support capital ratios,” added Moody’s.