By Makiko Yamazaki
TOKYO (Reuters) -Sumitomo Mitsui Financial Group (SMFG), Japan's second-largest bank, on Thursday reported a 10.7% increase in third-quarter net profit as growing corporate activity at home boosted demand for loans.
SMFG's net interest income rose as the prospect of Japan exiting years of deflation spurred various corporate actions, including mergers and acquisitions.
Net profit in the October-December period came at 266.37 billion yen ($1.8 billion) versus 240.6 billion yen a year earlier.
SMFG kept its full-year profit forecast through March at 920 billion yen, which compared with the 921.36 billion yen average of 12 analyst estimates compiled by LSEG.
The annual outlook exceeds the previous record set a decade ago and is also above the 900 billion yen target the bank set in its business strategy for three years through March 2026.
The Topix banks index has surged to the highest since 2008 on hopes that an exit from the central bank's ultra-easy policy would widen the spread between deposit and lending rates and boost Japanese banks' net interest income after years of being squeezed by rock-bottom rates.
But uncertainties over the U.S. economy could weigh on profit at Japanese banks. High rates last year boosted banks' net interest income, but that revenue driver looks to be flagging as the Federal Reserve pauses interest rate hikes, loan growth slows, and banks pay more to retain deposits.
Net interest income from overseas businesses at SMFG's main banking unit slipped in the nine months through December due to higher deposit funding costs.
Lower borrowing costs could spur dealmaking and trading in investment banking, where SMFG has been trying to catch up in the United States through partnership with Jefferies Financial Group.
Jefferies said in January that SMFG plans to increase its equity stake to 15% from 9.1% to become Jefferies' largest shareholder. SMFG will gain a seat on its board after passing the 10% threshold.
($1 = 146.9100 yen)