UPDATE 4-Big Japan banks forecast record profits, signal optimism as domestic rates normalise

(Adds analyst comment in paragraphs 8 and 9, interest rate outlook in paragraph 10.)

By Anton Bridge

TOKYO, May 15 (Reuters) - Japan's three biggest banks forecast record income in the coming year on Wednesday, signalling increased optimism about an economy that has only just exited from years of negative interest rates.

The results from Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group also show how Japanese banks are benefiting from higher interest rates in overseas markets, such as the United States, as well as a weaker yen, which inflates profits when earnings from abroad are brought home.

For years Japan's big banks have been squeezed by the central bank's massive monetary stimulus, including negative interest rates. The Bank of Japan in March raised interest rates for the first time in more than a decade and a half, heightening expectations that banks will be able to make more money from lending.

"We are entering a world with interest rates, which is a plus for us," MUFG's group chief executive, Hironori Kamezawa, told reporters.

For the current year, Mitsubishi UFJ expects a net profit of 1.5 trillion yen ($9.6 billion), a slight increase over the year just ended which saw profit jump by a third to a record.

He said the full-year results, which the banks focus on rather than quarterly numbers, were "extremely strong".

Likewise, second-ranked SMFG forecast a record full-year net profit of 1.06 trillion yen - the first time it will exceed the 1 trillion yen mark - and third-ranked Mizuho projected a record 750 billion yen. Both of those forecasts represent a 10% increase on the year just ended.

“The record results of the big three Japanese banks highlight the importance of the U.S. market to their businesses, with the results being helped by higher interest rates globally and the weak yen,” said Graeme Knowd, a veteran banks analyst who now heads Tokyo-based consulting firm Knowd Advisory.

“These results make clear the detrimental effects of a decade (more in the case of Japan) of low rates on bank profits. In a more normal rate environment Japanese banks should be capable of delivering profits and ROE close to global peers.”

Further interest rate rises this year may come as early as this summer or autumn, say former Bank of Japan

executives

. The central bank's next monetary policy meeting is set for mid-June.

BIG QUESTION

The question now is how much banks can benefit from improving demand for deals and higher interest rates to come at home.

One telltale sign may be in the mindset of Japanese businesses and households, where years of deflation forced people and companies to hoard cash.

"We are extremely positive on the Japanese economy," SMFG CEO Toru Nakashima told reporters.

"The mindset of Japanese corporate managers is much more optimistic than in the past," he said, though he added that economic benefits have yet to trickle down to the average citizen.

Investors, for one, appear optimistic on the outlook for banks. The Tokyo market's index of bank stocks is up 61% over the last year, far outstripping the TOPIX index , the broadest measure of Tokyo stock performance, which has gained 29%.

Both Mitsubishi UFJ and SMFG said they would each spend up to 100 billion yen buying back and cancelling shares. SMFG said it would also carry out a 3-for-1 stock split for shareholders as of Sept. 30.

For the fourth quarter, Mitsubishi UFJ reported a 75% decline in net profit to 193 billion yen ($1.2 billion) from the same period a year ago when profits surged due to the sale of a subsidiary.

SMFG's profit grew more than four times to 170 billion yen. Both banks handily beat expectations.

Mizuho, meanwhile, reported net profit tripled to 36.7 billion yen. That number, too, came in ahead of estimates.

($1 = 156.3200 yen) (Reporting by Anton Bridge; Editing by David Dolan, Edwina Gibbs and Kim Coghill)