TOKYO (Reuters) - Japan's top banks logged strong second quarter profit growth thanks to equity portfolios boosted by a surge in the Tokyo stock market, but other benefits of "Abenomics" have yet to spread to their core lending business.
Prime Minister Shinzo Abe's aggressive reflationary policies have pumped up the stock market since late 2012 -- the benchmark Nikkei average .N225 ended September 63 percent higher than a year earlier -- but bank lending is still struggling to recover, as companies remain reluctant to invest and consumer spending has lost steam.
A year after Abe took financial markets by storm with promises to revive a moribund economy, data showed growth slowed sharply and that his "Abenomics" policy mix is yet to secure a durable recovery.
Mitsubishi UFJ Financial Group (MUFG) (8306.T) and Mizuho Financial Group (8411.T), respectively Japan's largest and second largest lenders by assets, posted strong results on Thursday for the first half of the financial year.
For the six months ending in September, MUFG's net profit grew 83 percent from a year earlier to 530.2 billion yen ($5.33 billion), and Mizuho's grew 133 percent to 429.8 billion yen.
For the July-September quarter alone, according to Reuters' calculations, net profit rose 156 percent to 274.9 billion yen at MUFG, and totaled 181.8 billion yen at Mizuho, up from 356 million yen a year earlier, when Mizuho had booked hefty losses on its stock holdings.
Both banks were helped by small bad loan costs.
For the full-year ending in March, MUFG raised its forecast for net profit to 910 billion yen from 760 billion yen, above the 842.6 billion yen projection by Starmine's SmartEstimate.
Mizuho lifted its full-year net profit forecast to 600 billion yen, broadly in line with the 588.4 billion yen projection by Starmine's SmartEstimate.
Prior to the release of the results, MUFG's share closed 1.6 percent higher, and Mizuho shares closed up 0.9 percent, while the Broader Topix index .TOPX rose 1.2 percent.
Whereas U.S. and European banks have had to put aside billions of dollars to cover legal costs arising from a string of scandals ranging from interest rate manipulation and money laundering to the sale of risky mortgage-backed securities, Japanese banks have remained largely unscathed.
But, they have come under close public scrutiny after a scandal erupted in September over loans extended to organized crime groups by Mizuho's core commercial bank.
The likely impact of the scandal on Mizuho's businesses and the broader banking sector is still unclear, but Japan's banks are being forced to strengthen loan scrutiny procedures.
Japan's third largest lender, Sumitomo Mitsui Financial Group (8316.T), on Tuesday reported net profit rose 53 percent in the first half from a year ago, but second quarter growth was just 2 percent up from a year earlier at 217.4 billion yen.
Koichi Miyata, president of SMFG, noted the sluggish investment climate, telling a news conference; "Loan demand is not in full-fledged recovery yet, like the one led by capital spending."
Gross domestic product data released on Thursday showed growth in the world's third-biggest economy decelerated in the third quarter after leading the Group of Seven industrial powers in the first half of the year.
Capital spending, personal consumption and exports all moderated, though there are expectations that consumer spending will pick as people try to beat a sales tax rise planned next year.
Japanese banks have long been suffering tepid loan demand amid fragile economy. Flush with deposit money, the banks bought massive amount of Japanese government bonds, a trend that accelerated after the global economic turmoil in 2008.
The lenders said there are signs of a pickup in domestic loan demand this year, but the overall situation of lopsided deposit money has not changed.
Year-on-year growth in outstanding loans by Japan's major banks moved into positive territory in December last year after 37 straight months of decline, with September logging a 1.9 percent rise, the Bank of Japan data shows.
Still, deposits at the banks continue to grow faster, with a 3.5 percent year-on-year increase in September.
In the circumstances, the share market rally has been a savior. Japan's banks hold massive equity portfolios, which include client companies' shares and mutual funds, and before the share market's dramatic rally the banks had been carrying valuation losses on their stock holdings.
Also, the aggressive bond buying program begun by the BOJ in April has made it difficult for the banks to make profit from JGB trading, which had been one of their main profit drivers.
Designed to push down long-term interest rates, thus raising prices of JGBs, the BOJ's moves could have been a boon to the banks. But heightened volatility in the JGB market has reduced the appeal of the government debt for banks.
SMFG's core banking unit cut its JGB holdings to 14.7 trillion yen as of the end of September, down from 26.2 trillion yen at the end of March, immediately before the BOJ's launched its bold strategy.
"We are rebalancing our portfolio, shifting from bonds to stocks," SMFG's Miyata said. ($1 = 99.4150 Japanese yen)
Reporting by Taiga Uranaka; Editing by Simon Cameron-Moore