Growing fees, higher rates lift Sumitomo Mitsui Trust Bank’s profits

SMTH’s low-risk asset portfolio meant that profitability is weak.

The rise of domestic interest rates and growing fees will help Sumitomo Mitsui Trust Bank (SMTH) improve its profitability, but its growing foreign currency loan portfolio will give rise to risks.

Japan’s largest trust bank by assets is expected to maintain its low asset risk and strong liquidity over the next 12-18 months, Moody’s Ratings said in a report where it also affirmed SMTH’s A1 long-term senior unsecured ratings and a3 baseline credit assessment.

SMTH will continue to see modest capitalisation and weak profitability, however.

Japan’s largest trust bank by assets features a low-risk asset portfolio. Whilst this meant that the problem loan ratio is much lower than the industry average, it also meant that profitability is weak.

SMTH’s problem loan ratio is 0.3% as of March 2024 versus the 1.2% average of Japan’s three megabanks– MUFG, Mizuho Bank, and SMBC. 

However, SMTH’s growing foreign currency denominated loans presents unseasoned risks, Moody’s warned. SMTH has been growing these loans– which include loans for project finance– in a bid to improve its profitability.

What will help improve profitability and earnings are the gradual rise of domestic interest rates and SMTH’s bid to grow its fees and commissions.

Fees and commissions made up 54% of the group's gross business profit in fiscal 2023, significantly higher than the average of 24% for Japanese banks in the first half of fiscal 2023, according to Moody’s.

“SMTH's strong funding and liquidity are credit strengths, supported by its stable customer deposit base and low dependence on confidence-sensitive market funding. Its strong and stable franchise in the domestic trust banking market has resulted in its strong deposit-gathering ability,” the ratings agency said.