Japan's top two banks take profit hits as bad debt costs rise

By Takashi Umekawa

TOKYO (Reuters) - Japan's two biggest banks on Friday both reported first-half profits that tumbled by more than a third on a surge in costs from bad debts, highlighting the impact of the COVID-19 pandemic on the world's third-largest economy.

Despite the downturn, top lender Mitsubishi UFJ Financial Group Inc (MUFG) raised its full-year forecast, while Sumitomo Mitsui Financial Group (SMFG) stuck to its outlook, suggesting some confidence about the months ahead.

While Japan has been hit hard by the economic slowdown, it has been spared the worst of the health crisis, and many companies have been cushioned by government stimulus, which has helped rein in bankruptcies. However, worries remain.

"The government's measures helped ensure that bankruptcies didn't increase. Still, there are a lot of clients who we think are holding a fair amount of potential risk," SMFG CEO Jun Ohta told a briefing.

"There's certainly the possibility that we could see that emerge in the second half or the next financial year, so we weren't confident enough to hike our full-year forecast."

Bankruptcies dropped to their lowest level in 30 years in April-September, according to Tokyo Shoko Research, thanks to efforts by the government and the central bank to prop up struggling firms.

Yet banks in Japan have been grappling with years of negative rates and a slowly declining domestic market. The pandemic has only added to their long-term uncertainty.

"Although Japanese banks have been struggling for profits, they need to invest more by building a war chest through reducing employees and retail branches," said Ryoji Yoshizawa, a senior director at S&P Global Ratings.

"Otherwise, the gap will be worse between Japanese banks and global rivals in 5 to 10 years."

ECONOMY STILL WEAK

The economy is likely to shrink at a slower pace than previously expected this year, a Reuters poll showed on Friday, although weakening consumer prices could put Japan on the cusp of mild deflation.

MUFG, which owns 24% of Morgan Stanley, said its net profit in April-September came in at 400.8 billion yen ($3.82 billion), compared with 607 billion yen a year earlier.

Credit costs, which include funds set aside to cover bad loans, saw a 14-fold jump from the same period a year earlier.

Still, it raised its profit forecast for the year to end-March to 600 billion yen from 550 billion yen, compared with the 618.9 billion yen average of 11 analyst estimates, according to Refinitiv data.

Second-ranked Sumitomo Mitsui reported a 38% drop in half-year profit to 270 billion yen, from 432 billion yen a year earlier.

It said bad loan costs more than trebled.

($1 = 104.9900 yen)

(Editing by David Dolan, Muralikumar Anantharaman and Jacqueline Wong)