Japan’s big banks are unlikely to see a sustained rebound in earnings until risk appetite returns to global financial markets, one analyst told CNBC on Wednesday.
While Japan’s three largest banks have delivered mixed first-quarter results this week, all of them reported huge gains from bond trading in the April to June quarter. Still, there’s a reason to be cautious according to Naomi Fink, Japan Strategist at Jefferies.
"The Japanese financial sector is pro-cyclical, so I don't foresee too much outperformance until risk comes back on the table," Fink told CNBC Asia’s "The Call".
Japan's biggest lender Mitsubishi UFJ Financial Group nearly tripled its profit from bond trading, while bond trading profit at No. 2 bank Mizuho Financial Group jumped nearly six-fold from a year ago. Sumitomo Mitsui Financial Group similarly reported robust gains from bond trading.
Concerns about Europe's debt crisis and worries about the outlook for the global economy have seen investors flocking to low-risk plays such as U.S. Treasurys and Japanese government bonds (JGBs), boosting their prices and pushing down yields.
"Japan's banks hold large balances of JGBs, and that provides a buffer against sharp risk asset losses, but it limits the potential for profits," Fink said.
She said the financial sector has a large holding of JGBs because it is generally risk averse, a spillover effect from the financial crisis that Japan faced in the late 1980's and early 1990'. But this conservative asset mix might limit the sector's recovery, Fink added.
"We probably have to see quite a few quarters of diversification before we start getting excited about any type of lead to a return to risk environment," Fink said. She is underweight on the banking sector short term, adding that banks will sustain a rebound only when Japan’s economy does.
By CNBC's Adeline Chan