TWO OF Japan’s megabanks reported solid quarterly profit on Monday (Jul 31) amid hope that the Bank of Japan’s policy change would herald a sea change in their business after years of being squeezed by rock-bottom interest rates.

The central bank’s relaxation of its cap on bond yields on Friday boosted the prospect of a steeper yield curve creating a windfall for lenders, sending Japan’s benchmark index of banking stocks to eight-year highs.

Higher government bond yields will in the long run lift returns on bond holdings at major lenders, which previously had limited options on where to park massive deposits and so escaped to higher-yielding assets overseas such as US Treasuries.

The tailwind comes as top banks revamp their business structures to withstand ultra-low rates at home, by slimming domestic retail operations, beefing up presence in Asia through acquisitions and ramping up US investment banking.

Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group, Japan’s second- and third-largest lenders by assets respectively, on Monday stuck by their full-year net profit forecasts, which point to their highest earnings since the mid 2010s.

For April-June, SMFG’s net profit dropped 1.8 per cent from the same period a year earlier to 248 billion yen (S$2.31 billion). That compared with the 225.74 billion yen average of two analyst estimates compiled by Refinitiv.

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Mizuho reported a 53.9 per cent rise in net profit for the quarter.

Biggest lender, Mitsubishi UFJ Financial Group (MUFG), will report quarterly earnings on Tuesday. REUTERS