The yen gained on Wednesday following a rally in Japan’s equities and bets on more fiscally responsible policies after Prime Minister Takaichi’s election win.
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Japan’s largest banks posted record annual profits in their latest financial results, but earnings growth could slow as credit costs rise and geopolitical risks cloud the outlook, analysts say.
Mitsubishi UFJ Financial Group, the country’s largest lender, said net profit rose 30% from a year ago to 2.4 trillion yen for the fiscal year ended March 2026, a record high for the third consecutive year.
Similarly, Sumitomo Mitsui Financial Group and Mizuho Financial Group also reported record annual profits in their latest earnings, rising 34% and 41% from a year ago, respectively.
“Higher yen rates are improving lending margins and supporting net interest income, while healthy corporate funding demand and stronger fee income are adding to revenue,” said Kaori Nishizawa, Director of Banks at Fitch Ratings.
Nomura reiterated its bullish stance on Japan’s major banks and named Sumitomo Mitsui and Mizuho as its top picks. The three megabanks — Mitsubishi UFJ, Sumitomo Mitsui and Mizuho — still “look undervalued relative to the strength of their earnings,” Nomura said.
However, analysts said the lenders could struggle to keep profits at record levels.
“Earnings growth is likely to moderate,” said Nishizawa, noting that recent upside has come from one-off items, including market-related gains and contributions from acquisitions.
Banks also face higher credit costs, competition for deposits and pressure from broader macroeconomic and geopolitical risks, according to Nishizawa.
“As such, sustainability of profit growth at current levels is likely to be challenged,” she added.
The earnings improvements appear more structural than in previous cycles, driven by higher domestic interest rates, inflation and stronger corporate funding demand, said Koichi Niwa, an analyst at UBS.
Stronger wholesale and corporate finance activity has benefited large Japanese banks and helped lift recent earnings amid renewed investor interest in the sector, Niwa said.
But financing mergers and acquisitions, large corporate lending, overseas loans and structured transactions often require more capital than domestic lending.
“As a result, even if profits are growing, banks also need to allocate more capital to support balance-sheet expansion,” he added.
Lorraine Tan, director of equity research in Asia for Morningstar, expects Mitsubishi UFJ’s earnings growth to slow to 5% from fiscal 2027, as global interest rates outside Japan are expected to ease.
“This, coupled with slowing contributions from associate Morgan Stanley, should eat into domestic growth,” Tan added.
Tan also expects Sumitomo Mitsui’s earnings growth to slow to 9% through fiscal 2028, citing its exposure to a loan book with around 35% outside Japan, while Mizuho’s net interest margin gains could ease from fiscal 2027 as interest rates outside Japan resume an easing cycle.
Meanwhile, the Japanese lenders are also keeping a close eye on developments in the Middle East, which could weigh on their earnings outlook.
Junichi Hanzawa, MUFG’s chief executive, said at a recent earnings briefing that the bank’s bottom line could be negatively impacted if Middle East tensions continue to build. A further rise in oil prices before year-end could also weigh on global economic growth.
“Middle East-related risks, including potential spillover effects, are partly provisioned for and remain closely monitored,” Sumitomo Mitsui said in an earnings filing.
Mizuho also said that it “will continuously monitor the external environment & its potential impacts, and flexibly revise [its] financial outlook if necessary going forward.”