According to estimates from Fitch Ratings, the impaired loan ratios for both Japanese and Australian banks are projected to rise to 1.5% in 2027, up from just over 1% in 2026. Fitch attributes this upward trend to slowing economic growth, elevated borrowing costs, and a normalization of credit conditions following the pandemic. Along with the US, Japan’s banking system is expected to see a decline in capital adequacy ratios in 2027, while Germany and Switzerland are projected to maintain the strongest capital positions. Meanwhile, Italy is forecast to remain among the most profitable global banking markets.
In response to rising global risks, particularly geopolitical tensions surrounding the conflict involving the US, Israel, and Iran, Japan’s major financial institutions have proactively increased their credit buffers. A separate report from S&P highlights that the country’s three megabanks have raised their loan-loss provisions, with MUFG tripling its reserves and Mizuho doubling its own.
This build-up of provisions comes despite a strong financial performance in the fiscal year ending March 31, during which Japan’s major banks recorded a 32.7% year-on-year surge in net profits to $37.25 billion. Data from the Financial Services Agency (FSA) shows this profitability was driven by a rise in domestic net interest income, supported by stronger loan volumes and wider interest margins. However, S&P Global Market Intelligence warns that deposit growth at these megabanks is currently lagging behind loan growth, a trend that could eventually restrict their capacity for both lending and security investments.
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