Japan's best domestic bank 2017: Sumitomo Mitsui Financial Group
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Japan's best domestic bank 2017: Sumitomo Mitsui Financial Group

Sumitomo Mitsui Financial Group

Japanese banks are facing a difficult future, being forced to choose between a domestic market that offers few obvious sources of growth and an international market that is cluttered with competition.

Sumitomo Mitsui Financial Group (SMFG) gives a good demonstration of how rapidly Japan’s banks are turning overseas. SMFG’s offshore loan book grew around 13% year on year by the time it announced its first-half profits for the six months to the end of September. The bank now has an overseas loan book worth around $227 billion, making up for lacklustre demand from its onshore clients.

But even though moving offshore has now become the obvious plan for Japanese banks, the bulk of SMFG’s business continues to be onshore. The firm generated around 68% of its profit from the domestic market in the financial year ended March 31, 2017. That comes as little surprise, but what is striking is how well SMFG has been able to navigate the market.

SMBC Nikko, the securities arm created from its acquisition of Nikko Cordial Securities in 2009, managed to increase its profits by almost 31% in the six months to September 30, 2017.

SMFG’s retail unit, which dwarfs its other divisions in gross profit terms, achieved a slight rise in first-half income despite the sharp drop in bond trading. SMFG even managed to increase its lending, despite a wider slowdown in loan demand.

The more domestic focus of its business – whatever its long-term logic – is also helping to keep its costs in check. Its general and administrative expenses, a gauge of non-revenue generating operating costs, rose only 1% compared with the first half of the previous financial year. By contrast, MUFG saw its G&A expenses rise 5%, while those at Mizuho rose 3.5%.

SMFG also impressed Asiamoney in not relying too much on the sale of stock to boost profits. By selling some of its domestic equity portfolio in the first half, Mizuho generated a net gain of ¥115 billion ($1 billion), around 25% of pretax profits. SMFG also pulled in a large chunk from the sale of securities, nabbing ¥52 billion, but this only represented 8% of its overall profits, according to Moody’s.

This leaves SMFG with an obvious way to boost profits in the long term, provided equity prices hold up. It also gives a clear demonstration that SMFG’s management, led by chief executive and president Takeshi Kunibe, wants operating performance, not trading gains, to drive profits.