Banks need to accelerate reforms to stabilize business foundations

Banks’ business results have been improving. Temporary factors such as government measures seem to have played a large role. It is important for them to solidify their growth strategies through structural reforms while results are good.

In the consolidated financial results for the first half of the business year ending September 2021, the combined net profit of the three megabank groups increased by more than 80% from the previous year. Mitsubishi UFJ Financial Group, Inc. posted its highest-ever half-year profit.

All three megabank groups have revised upward their full-year forecasts for the business year ending March 2022, and total net profits are expected to exceed ¥2 trillion for the first time in four years.

About 90% of the 77 listed regional banks and banking groups have either increased their net profits or returned to profitability.

However, looking at the details, the outlook is not entirely rosy.

The main reason for the strong results was a larger-than-expected decline in expenses such as loan-loss reserves to prepare for the possibility of loan defaults, as economic activities resumed.

The number of bankruptcies has declined due to the effect of effectively interest-free and unsecured loans for small and medium-sized companies introduced by the government as a measure to respond to the novel coronavirus pandemic. Regional banks say that the government’s subsidies for interest on such loans are also a major factor.

On the other hand, the prolonged period of ultralow interest rates due to monetary easing has made it difficult to make profits in the ordinary lending business. The three megabank groups’ total net operating profits, which indicates profits from their core businesses, declined. The recovery of their earning power is only half complete.

Monetary easing is expected to continue for the time being, and the number of bankruptcies may increase again when the government support ends. The business environment surrounding banks will remain tough as competition with tech companies and others intensifies amid the ongoing digitization of the economy.

In addition to improving management efficiency, such as reviewing branch networks, it will be essential to create new businesses, such as financial services based on information technology. As business results are currently strong, now would be a good time to accelerate the reform process.

MUFG Bank is planning to start a business to help customers build their assets by offering a variety of financial products such as stocks and insurance through a smartphone app. The bank intends to develop it into the foundation of its financial services.

Sumitomo Mitsui Financial Group, Inc., which has embarked on a full-scale effort to develop new businesses, has established a company that offers electronic seal services based on the ideas of its young employees. The new company was profitable within its first 18 months. More successful cases like this need to follow.

The importance of banks in supporting the economy by smoothly supplying funds to companies and individuals will not change. In order to fulfill this role, banks need to strive to rebuild stable business foundations.

— The original Japanese article appeared in The Yomiuri Shimbun on Dec. 4, 2021.