Sumitomo Mitsui Financial Group Earnings: Decent Outlook Underpins Dividend Growth

We raise our Sumitomo Mitsui Financial Group, or SMFG, fair value estimate to JPY 10,700 per share from JPY 7,990, placing shares in 3-star territory. We lift our earnings forecast by 5% for fiscal 2024 and 10%-11% thereafter, following a larger risk-weighted assets base carried over from fiscal 2023 (ended March 2024) and expectations for stronger near-term growth in noninterest income. Also, our weighted average cost of capital falls to 8% from 8.5%, to be consistent with peers. Our revised forecasts exceed SMFG’s profit target of JPY 1.06 trillion and JPY 1.10 trillion by 4% and 11% for fiscal 2024-25, respectively, as we see a more gradual decline in the yen to US dollar exchange rate, which should buffer translated impact from global operations, and we think SMFG can benefit from stronger fee income growth. We reiterate our view of Japan’s policy interest rates rising only gradually, leading to a stable net interest margin over the next few years as a rise in domestic NIM offsets lower overseas NIM.