Shares of Japanese banks tumbled on Wednesday after top lenders Mitsubishi UFJ Financial Group and Mizuho Financial Group posted sharp falls in quarterly profit, disappointing investors expecting them to capitalise on economic growth and improving loan spreads.
Japan's top four banks saw about 2.2 trillion yen (US$18.5 billion) worth of market value wiped out by the slide.
Although Japan's large banks are beginning to see some benefit from rising interest rates, and the economy is enjoying its longest post-war expansion, slack corporate demand for loans and exposure to the sickly consumer finance sector are holding the industry back.
MUFG, Mizuho, and Resona Holdings all reported double-digit falls in net profit after the close of trade on Tuesday, triggering a sharp sell-off in the sector and helping drag the Nikkei 225 Average down over 2%.
MUFG's stock was down over 5% towards the close of the trading session, while Resona lost
5%, Mizuho tumbled over 10%, and Sumitomo Mitsui Financial Group, which posted a flat quarterly net profit last week, slid over 6%.
"The market is negatively reacting to net profit falls," said Katsuhiko Sasajima, a bank analyst at JP Morgan. "Right now increasing loan volume is difficult given weak demand for loans as companies have rich cash flow."
MUFG, the world's biggest bank by assets, said net profit fell 31% in April-June, citing the absence of special items that boosted earnings last year, and higher provisions against interest repayments at its consumer lender unit.
Mizuho saw its profit tumble the most, suffering a drop of 50%. Japan's second-largest bank said it earnings were dented by losses on stock investments and weak commissions as Japan's mergers and acquisitions market dried up.
The Bank of Japan began raising rates from zero last year, ending more than half a decade of essentially free money, and is widely expected to raise them again at least once more this year, which should allow banks to charge more for loans.
But the improvement in loan spreads so far has not fed through to a rise in income. Net interest income at MUFG fell 1.1% during the latest quarter, and dropped 5.3% at Mizuho.