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By Taiga Uranaka
TOKYO (Reuters) - Japan's top three banks reported profits for the first half of the year far beyond their initial estimates, as reduced credit costs made up for more muted stock gains during a period of cooling enthusiasm over "Abenomics".
Mitsubishi UFJ Financial Group Inc (MUFG) (T:8306), Mizuho Financial Group Inc (T:8411) and Sumitomo Mitsui Financial Group Inc (SMFG) (T:8316), however, continued to see paltry lending growth, highlighting the challenge faced by Japan's central bank in encouraging borrowing and spending to stimulate the economy.
The Abenomics policies of Prime Minister Shinzo Abe were so well received when he took office that there was a surge last year in the prices of shares - of which banks own considerable amounts. But as economic data faltered, so did investor optimism.
Not expecting a repeat of last year, MUFG in April forecast a 15 percent decline in net profit for the six months through September. But lower credit costs combined with stock gains to push up first-half profit by 9 percent to 578.72 billion yen (3.17 billion pounds), keeping MUFG on track for another record year.
"The biggest factor for overshooting our own first-half forecast is credit costs," President Nobuyuki Hirano told a news conference after MUFG reported earnings.
For the year through March 31, MUFG kept its profit forecast at 950 billion yen, down 3.5 percent from the previous year. That compared with a 989.9 billion yen average estimate of 19 analysts in a Thomson Reuters poll.
CREDIT COSTS
Mizuho and SMFG cited similar reasons when reporting milder first-half profit declines than projected at the start of the business year. SMFG even raised its outlook.
Net profit at No. 2 lender Mizuho was 17 percent lower at 355.29 billion yen versus its forecast of 250 billion yen. The bank also left its full-year view at 550 billion yen, down 20 percent, versus the 580.5 billion yen estimate of 17 analysts.
"An earnings boost from smaller credit costs is not something you can keep counting on," said Miki Murakami, director at Fitch Ratings in Tokyo. "Unless the banks show stable revenue growth, uncertainty remains on the sustainability of their earnings."
In domestic lending, a pick up in loan volume did not make up for falling interest rates. Lenders have been lowering rates to tempt borrowers, squeezing interest margins - or the difference between interest paid on deposits and earned on loans.
Margins are widely expected to suffer further following central bank economic stimulus announced on Oct 31.
(Editing by Christopher Cushing)