Japanese banks sound caution for earnings as Omicron highlights bad loan risks

2/2 © Reuters. FILE PHOTO: Sumitomo Mitsui Banking Corporation's signboard is pictured at its branch in Tokyo, Japan, January 25, 2017. Picture taken on January 25, 2017.REUTERS/Kim Kyung-Hoon 2/2

By Makiko Yamazaki and Ritsuko Shimizu

TOKYO (Reuters) -Japan's biggest lenders on Wednesday all sounded alarm about the risk the Omicron variant could have on their earnings, reviving concerns that a resurgent pandemic could trigger more bad loans.

It was a sobering assessment from Japan's three top banks - some of the world's biggest lenders by assets - and underscored how the latest coronavirus variant could put more downward pressure on an already fragile domestic economy.

Top lender Mitsubishi UFJ (NYSE:MUFG) Financial Group Inc kept its full-year net profit outlook at 1.05 trillion yen ($9.16 billion), even though its third-quarter profit rose 40% from a year earlier, bringing the nine-month total to 1.07 trillion yen.

The annual forecast compared with the 1.08 trillion yen average of 11 analysts' estimates compiled by Refinitiv.

"With chip shortages affecting supply chains and the Omicron outbreak clouding the economic outlook, we will need to consider possibilities of booking provisions in a forward-looking manner," an MUFG spokesperson said at a briefing.

Banks' earnings were inflated over the last few quarters by the release of cash from provisions that had been set aside to deal with a potential flood of pandemic-related bad loans, as government subsidies kept many businesses afloat.

But the third quarter saw no such boost.

Credit costs at the major banks turned up from the previous quarter, with provisions booked for some large borrowers amid concerns that the Omicron outbreak could cool down the economy's budding consumption-led recovery.

Tokyo's new COVID-19 cases exceeded 20,000 for the first time on Wednesday, dimming hopes that an Omicron-fuelled wave of infections is peaking out. The capital and most of Japan are now under curbs to contain the spread of the virus.

Sumitomo Mitsui (NYSE:SMFG) Financial Group Inc, the country's second-largest bank, reported a third-quarter net profit of 168.7 billion yen, up 3% from a year earlier.

Net profit at Mizuho Financial Group Inc, the country's No. 3 lender, dropped 33% to 93.0 billion yen for the three months through December.

Sumitomo Mitsui and Mizuho both maintained their full-year profit forecasts.

The banks also cited risks related to tighter U.S. monetary policy, with the Federal Reserve expected to start raising interest rates from March.

"We'll be carefully managing our foreign bond portfolio, as we now see larger downside risks to the economy from faster tightening," a Mizuho spokesperson said at a briefing.

($1 = 114.6000 yen)