Japan's MUFG profit falls

Mitsubishi UFJ Financial Group (MUFG), the world's biggest bank by assets, said quarterly profit dropped 16 percent from a year earlier due to losses on its bond holdings, while rival Mizuho Financial Group posted a 33 percent earnings gain.
Japanese banks have been on the mend since 2003 thanks to a stronger economy and efforts to clean up problem loans. The top lenders posted record earnings last year and expect further expansion as demand for credit rebounds and the country's long-flat interest rates rise.
Many banks are likely to see earnings falter this year, however. That's because recent gains have been fuelled in part by the return of unused cash previously set aside to cover soured debts - a pool of funds that has now largely dried up.
Banks have also been hit by rising bond yields, which have cut the value of their huge holdings of Japanese government debt. Bond losses also helped drag down quarterly profit at No 3 lender Sumitomo Mitsui Financial Group (SMFG) by 36 percent.
Marc Desmidt, head of the Japanese large-cap equity team at Merrill Lynch Investment Managers, said the bond losses obscured what were otherwise healthy results.
Group net profit at MUFG totalled 219.54 billion yen ($1.92 billion) in the three months to June 30, down from a combined 260.4 billion yen in the same quarter last year at MUFG's two predecessor banks, Mitsubishi Tokyo Financial Group and UFJ Holdings.
Mitsubishi Tokyo and UFJ merged in October. MUFG suffered a net 93.2 billion yen reversal in bond-related income, swinging from a 69.1 billion yen gain last year to a 24.0 billion yen loss. Both MUFG and Mizuho left their full-year profit forecasts unchanged. MUFG projects annual earnings will fall 36 percent to 750 billion yen, while Mizuho sees an 11 percent annual rise to 720 billion yen.
Group net profit at Mizuho totalled 230.84 billion yen. The bank, which wrote off 130 billion yen in bond losses at the end of the last financial year in March, suffered a smaller bond-related income fall, while a lower tax bill and a rise in fees and commissions worked in its favour.
Mizuho has taken pains to bolster its retail business, long a weak point, and has increased its higher-margin lending to small companies at a faster rate than its rivals.
Looking ahead, Japanese banks are set to profit from rising interest rates in Japan and a renewed corporate appetite for credit, by charging more for loans while holding down the return they pay depositors.
Led by MUFG, big banks have already begun lifting their prime lending rates to reflect a rise in the Bank of Japan's key overnight rate on July 14 - its first such rate rise in six years.
Increased revenue from lending is expected eventually to outweigh banks' bond losses, but it will take time for tighter monetary policy to filter through to wider loan margins and higher bank profits.
In the meantime, the pain of tighter money is being felt more quickly than the benefits. Bond yields began surging in mid-2005 as investors anticipated the Bank of Japan's decision, ultimately taken earlier this month, to raise its key overnight rate from zero.