By Junko Fujita
TOKYO (Reuters) - Japan's three largest banks all reported lower annual profits on Wednesday, highlighting the challenges faced by the banking industry as the world's third-largest economy looks to be headed for another downturn.
The size of the declines varied - Sumitomo Mitsui Financial Group had a 1% drop while rival Mizuho reported an 83% dive - all three show the difficulty banks have in navigating Japan's ultra-loose monetary policy.
Japanese banks have had to cope for years with an ageing and shrinking population and massive central bank stimulus that has left them with razor-thin profit margins. Now, there are signs of economic weakness on the horizon.
A government assessment this week showed Japan may already be in recession due to the impact of a U.S.-China trade war and weak external demand. That is likely to drive up bad debt costs for banks as more loans go sour.
"Our core profit fell for a fourth straight year. We had expected this, but the environment is very tough," Kantesugu Mike, the chief executive of top lender Mitusbishi UFJ Financial Group, told a briefing.
MUFG, one of the world's largest banks by assets, reported a 12 percent slide in annual net profit, reflecting the squeeze on lending margins. The bank was also hit by a one-time charge from suspending development of a new system at a credit unit, reflecting increased competition from cashless services.
Mizuho, Japan's second-largest bank by assets, reported an 83% percent decline in net profit, to 96.6 billion yen (684.11 million pounds), in the year through March 2019.
That marked its weakest performance since the global financial crisis when the bank made a loss. The result was widely expected after Mizuho cut its outlook for the year two months ago.
Mizuho said it was hit by the cost of closing domestic branches and restructuring its securities portfolio.
"The restructuring costs that the bank incurred in its domestic retail business highlight the challenges that Japanese banks face in keeping their retail businesses profitable amid an ageing and shrinking population, and given the persistent ultra-low domestic interest rates," analyst Tetsuya Yamamoto of Moody's said in a note about Mizuho.
Sumitomo Mitsui, Japan's third-largest bank by assets, reported a 727 billion yen net profit for the year just ended from 734 billion yen in the previous year. For the year ending March 2020, SMFG forecast profit of 700 billion yen, down nearly 4 percent from the year just ended.
Bank of Japan Governor Haruhiko Kuroda on Wednesday said he was not considering additional easing right now but would consider it without hesitation if consumer prices lost momentum.
"We have decided we should be prepared for a certain amount of credit costs for this year," Mizuho Chief Executive Tatsufumi Sakai told a news conference, referring to money put aside to cover bad loans.
Mizuho also announced a five-year business plan saying it needed to be able to respond quickly to structural changes, including Japan's low birthrate and the industry's increased use of technology.
It said it would target consolidated net profit of 900 billion yen by 2023.
(Reporting by Junko Fujita; Editing by David Dolan/Christopher Cushing/Jane Merriman)