Japan's banks will likely bear the brunt of the Bank of Japan's (BOJ) negative interest rates move, but analysts are divided on how badly they'll be hit.
The BOJ blindsided global financial markets on January 29 by adopted negative interest rates for the first time, buckling under pressure to revive growth in the world's third-largest economy.
The move aims to motivate banks to both lower lending rates and lend more, by charging banks to hold their reserves with the central bank - charges that will eat into their profits, unless they can lend out the funds profitably.
Some analysts predict a big hit for Japan's banks.
Citigroup, which last week downgraded shares of the country's three megabanks, Mitsubishi UFJ (MUFJ), Sumitomo Mitsui Financial (SMFG) and Mizuho, to sell, said at the time that it expected "heavy pressure on earnings." It added that the BOJ's action would push down yields on the domestic loans and bonds that make up a major portion of bank balance sheets.
Citigroup's analysts said they assumed all market interest rates would decline by 20 basis points. The bank assumes that about 90 percent of Japanese domestic lending was at variable rates that would eventually be repriced lower, with the possibility that interest-rate competition could intensify.
It predicted that overall megabank net interest income would fall by about 300 billion yen ($2.60 billion) this fiscal year, equal to about 9 percent of Citigroup's net profit forecast.
"We note the possibility that the downward pressure on yields is not exhausted. The BOJ has stated that it will cut interest rates further if necessary," Citigroup noted.
"If the market were to price in further expansion in negative rates, then we think further downward pressure would be applied to bank earnings over the medium term."
But some analysts anticipate less of a hit to banks' profits.
"The hit to commercial banks' profits will be limited, as the Bank will continue to pay a positive rate on the bulk of existing central bank reserves," Marcel Thieliant, a Japan economist at Capital Economics, said in a note on Monday.
The new program, which takes effect later this month, works on a three-tier system of positive, zero or negative interest rates. The BOJ will apply a rate of 0.1 percent to the average amount held in 2015, with a zero rate for required reserves and a negative 0.1 percent rate on any funds above those two amounts.
Thieliant estimated that even if the BOJ lowered rates to negative 1 percent, commercial lenders' annual loss would be only around 300 billion yen, or about 4 percent of annual profits.
Banks may attempt to make up the difference by charging negative rates on deposits, he noted.
But while negative rates may push borrowing costs down, it isn't clear whether households and companies would borrow more, Thieliant said.
"Bank lending rates are already at historical lows, but the outstanding amount of bank lending was expanding at a mediocre 2.2 percent year-on-year in December," he said. "Rates may have to be lowered much further to boost borrowing," he said.
That means banks might not see much of a boost in net interest income to offset the cost of parking funds at negative rates.
- Nyshka Chandran contributed to this article.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter