Published: Friday, 13 Nov 2009 | 3:25 AM ET

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Mizuho Financial Group's first profit in five quarters and rival Sumitomo Mitsui Group's doubling of profit signal Japan's major banks are recovering from the economic crisis, albeit slowly.

Japanese lenders have suffered smaller credit losses than their Western rivals, but they have also taken longer to rebound, hampered by dependence on domestic lending and rock-bottom interest rates.

Economists expect Japan's deflation to persist until at least the second quarter of 2011, a Reuters poll recently showed, meaning that interest rates and revenue from lending will have little chance to rise.

One of the few bright spots has been the decline in bad-loan costs, which spiked last year following the collapse of U.S. investment bank Lehman Brothers.

But analysts predict that as long as Japanese banks rely on loans for the bulk of their revenue -- instead of fees and commissions, for instance -- they will continue to be outpaced by more nimble rivals such as HSBC Holdings.

Investors also worry that Mizuho, Sumitomo Mitsui and top lender Mitsubishi UFJ Financial Group may need to issue more equity to meet stricter capital regulations.

Mizuho President Takashi Tsukamoto told a news conference the bank had no plans at present to issue new common shares.

Mitsubishi, which owns a 21 percent stake in Morgan Stanley

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Four Straight Losses

Mizuho, Japan's second-largest bank by assets, reported a group net profit of 92.3 billion yen ($1.02 billion) for the July-September quarter, handily beating the average estimate of 60.8 billion yen in a poll of three analysts.

Mizuho failed to turn a profit for four straight quarters, losing a total of 726.3 billion yen. The bank was hit by heavy exposure to the equity market.

Japanese lenders traditionally take stakes in their corporate clients to cement business ties, making them vulnerable to swings in equity prices.

The benchmark Nikkei 225 rose 1.8 percent during July-September, compared with a 16.5 percent fall a year earlier.

Mizuho stuck to its forecast for a full-year profit of 200 billion yen. That compares with an average estimate of 144.2 billion yen in a poll of 10 analysts by Thomson Reuters.

Eclipsing Mizuho

Sumitomo Mitsui in recent years has eclipsed Mizuho in terms of market value and profitability. It has also been on a push to bulk up its securities business, long a weak point.

The bank paid about $6 billion earlier this year for Citigroup's Japanese retail brokerage, Nikko Cordial Securities.

Sumitomo Mitsui's July-September net profit came to 50.8 billion yen, against an average estimate of 21.6 billion yen in the poll of three analysts.

Sumitomo Mitsui cut its annual forecast for pre-tax recurring profit by 20 billion yen to 490 billion yen but stuck to its forecast for a full-year net profit of 220 billion yen. That compares with an consensus forecast  of 229.3
billion yen in the poll.

Shares of Mizuho have fallen about 30 percent so far this year, making the stock one of the worst performers among Japanese banks, while Sumitomo Mitsui has dropped nearly 15 percent.

Japanese banks do not release July-September numbers. Reuters calculated the figures by subtracting the previous quarter's results from the April-September numbers released on Friday.

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