By Taiga Uranaka
TOKYO (Reuters) - Japan's top banks logged strong second quarter profit growth and raised their full-year outlook as a surge in the Tokyo stock market boosted equity portfolios, but other benefits of "Abenomics" have yet to spread to their core lending business.
Prime Minister Shinzo Abe's aggressive reflationary policies started a bull run in late 2012 that saw the benchmark Nikkei average <.N225> end September 63 percent higher than it was a year earlier.
But, while Abe took financial markets by storm with election campaign promises to revive a moribund economy, a year on bank lending is still struggling to recover, with latest gross domestic product data showing companies remain reluctant to invest and consumer spending losing steam.
"We are seeing a slight increase in domestic loan demand, but capital expenditure has not shown sharp growth yet," Yasuhiro Sato, the president of Mizuho Financial Group told a news conference after releasing the group's results.
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 also helped by small bad loan costs.
"We are seeing notable improvement in business performance (of borrowers). It's an effect of Abenomics that bad loan figures remain low," MUFG President Nobuyuki Hirano told a news conference.
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.
ELUSIVE LENDING RECOVERY
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.
Gross domestic product data released on Thursday showed growth slowed sharply in the September quarter, with the "Abenomics" policy mix yet to secure a durable recovery.
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.
"The banks are not in a stage yet to see strong growth in lending, driven by Abenomics-led economic recovery," said Chikako Horiuchi, banking analyst at Fitch Ratings in Hong Kong.
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.
All of Japan's top three banks reduced their JGB portfolio in the six months ended in September, with SMFG's core banking unit cutting its 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 President Koichi Miyata said on Tuesday.
(Additional reporting by Nathan Layne and Chikafumi Hodo; Editing by Simon Cameron-Moore)