Japan’s megabanks post record profits, but analysts warn growth may slow as risks mount

Japan’s biggest banks posted record annual profits in their latest financial results, but earnings growth may slow as credit costs rise and geopolitical risks cloud the outlook, analysts say.

Mitsubishi UFJ Financial Groupthe country’s largest lender, in question Net profit rose 30% year-on-year to 2.4 trillion yen in the fiscal year ending March 2026; This is a record figure for the third consecutive year.

Similarly, Sumitomo Mitsui Financial Group And Mizuho Financial Group They also reported record annual profits in their latest earnings call. 34% And 41% respectively from a year ago.

“Higher yen rates improve credit spreads and support net interest income, while healthy corporate funding demand and strong fee income contribute to income,” said Kaori Nishizawa, director of banks at Fitch Ratings.

Nomura reiterated its bullish stance on Japan’s big banks, naming Sumitomo Mitsui and Mizuho as top picks. Nomura said the three megabanks (Mitsubishi UFJ, Sumitomo Mitsui and Mizuho) still “appear undervalued relative to the strength of their earnings.”

But analysts said lenders may struggle to keep profits at record levels.

“Earnings growth is likely to be moderate,” Nishizawa said, noting that the recent rise came from one-time items, including market-related gains and contributions from acquisitions.

Banks also face pressure from higher credit costs, competition for deposits and broader macroeconomic and geopolitical risks, according to Nishizawa.

“Therefore, the sustainability of profit growth at current levels is likely to be challenged,” he added.

UBS analyst Koichi Niwa said earnings improvements appeared more structural than in previous cycles, driven by higher domestic interest rates, inflation and strong corporate financing demand.

Niwa said stronger wholesale and corporate finance activity has benefited major Japanese banks and helped boost recent earnings as investors renewed interest in the sector.

However, financing mergers and acquisitions, large corporate loans, foreign loans and structured transactions generally require more capital than domestic loans.

“As a result, banks need to allocate more capital to support balance sheet expansion, even if profits are rising,” he added.

Lorraine Tan, Morningstar’s director of Asia equity research, expects Mitsubishi UFJ’s earnings growth to slow to 5% from fiscal 2027 as global interest rates outside Japan are expected to fall.

“This, coupled with the slowdown in contributions from partner Morgan Stanley, will negatively impact domestic growth,” Tan added.

Tan also expects Sumitomo Mitsui’s earnings growth to slow to 9% through fiscal 2028 and suggests it has exposure to a loan book of around 35% outside Japan, while noting that Mizuho’s net interest margin earnings may decline from fiscal 2027 as interest rates outside Japan continue their easing cycle.

Meanwhile, Japanese lenders are also closely monitoring developments in the Middle East, which could negatively impact their earnings outlook.

Junichi Hanzawa, MUFG’s chief executive, said in a recent earnings briefing that the bank’s profitability could be negatively affected if tensions in the Middle East continue to escalate. An increase in oil prices before the end of the year could also put pressure on global economic growth.

“Middle East-related risks, including potential spillover effects, have been partially covered and continue to be closely monitored,” Sumitomo Mitsui said in its earnings report. filing.

Mizuho too in question “It will constantly monitor the external environment and its potential impacts and revise it flexibly.” [its] forward-looking financial outlook, if necessary.”