The yen rose on Wednesday on a rally in Japanese stocks after Prime Minister Takaichi’s election victory and bets on more fiscally responsible policies.
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Japan’s biggest banks posted record annual profits in their latest financial results, but analysts say revenue growth could slow as rising credit costs and geopolitical risks cloud the outlook.
Mitsubishi UFJ Financial Group, Japan’s largest financial institution, announced that its net profit for the fiscal year ending March 2026 was 2.4 trillion yen, an increase of 30% from the previous year, a record high for the third consecutive year.
Similarly, Sumitomo Mitsui Financial Group and Mizuho Financial Group reported record annual profits, up 34% and 41% year-on-year, respectively, in their latest financial results.
“Rising yen interest rates are improving lending margins and supporting net interest income, while healthy corporate funding demand and rising fee income are boosting earnings,” said Kaori Nishizawa, director of banking at Fitch Ratings.
Nomura reiterated its bullish stance on Japan’s major banks, naming Sumitomo Mitsui and Mizuho as top candidates. Nomura said the three megabanks – Mitsubishi UFJ, Sumitomo Mitsui and Mizuho – still “appear to be undervalued relative to their earnings strength.”
But analysts said financial institutions could struggle to keep profits at record levels.
“Earnings growth is likely to slow,” Nishizawa said, noting that recent upside has come from one-time items such as market-related gains and contributions from acquisitions.
Banks also face pressure from rising credit costs, competition for deposits, and broader macroeconomic and geopolitical risks, Nishizawa said.
“As such, the sustainability of profit growth at current levels is likely to be difficult,” he added.
UBS analyst Koichi Niwa said the earnings improvement appears to be more structural than in previous cycles, driven by higher domestic interest rates, inflation and stronger corporate demand for capital.
Niwa said increased wholesale and corporate finance activity has benefited Japan’s big banks, contributing to a recent boost in earnings amid renewed investor interest in the sector.
However, financing mergers and acquisitions, large corporate loans, foreign loans, and structured transactions often require more capital than domestic loans.
“As a result, banks will need to allocate more capital to support balance sheet expansion, even if profits are growing,” he added.
Lorraine Tan, director of Asian equity research at Morningstar, expects Mitsubishi UFJ’s profit growth rate to slow to 5% from fiscal 2027 due to expected lower interest rates globally outside of Japan.
“This, coupled with slower contributions from Morgan Stanley affiliates, should hurt domestic growth,” Tan added.
Tan also expects Sumitomo Mitsui’s profit growth rate to slow to 9% until FY2028, citing the company’s outstanding loans outside Japan reaching around 35%, while Mizuho’s net interest margin growth may slow from FY2027 as interest rates outside Japan resume the easing cycle.
Meanwhile, Japanese financial institutions are also closely monitoring developments in the Middle East, which may weigh on their earnings outlook.
MUFG CEO Junichi Hanzawa said in a recent earnings conference that the bank’s earnings could be adversely affected if tensions in the Middle East continue to rise. Further rises in oil prices by the end of the year could put pressure on global economic growth.
“Middle East-related risks, including potential spillover effects, have been partially prepared for and continue to be closely monitored,” Sumitomo Mitsui said in its earnings report.
Mizuho also said it would “continue to monitor the external environment and its potential impact and flexibly review it.” [its] Future financial outlook as well, if necessary. ”
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