By Anton Bridge

TOKYO (Reuters) -Japan's second-largest banking group Sumitomo Mitsui Financial Group hit a record 1.18 trillion yen ($8.1 billion) profit for the financial year ended March 2025 and sees more growth ahead even accounting for the hit to its business from tariff uncertainty.

SMFG generated net income of 42 billion yen in the January-March quarter compared to 170 billion yen for the same period a year before - a 75% slump - but forecast a record 1.3 trillion yen in net profit for the coming financial year.

The end of deflation has encouraged borrowing by Japanese corporations for overseas expansion, mergers and acquisitions and capital investments amid a shrinking workforce in Japan.

The group has also benefitted from the Bank of Japan endingits policy of negative interest rates in March 2024, which raised margins.

Despite the bumper results, SMFG's prospects have suffered from the uncertainty following U.S. President Donald Trump's announcement of sweeping tariffs at the start of April.

Compared to its forecasts from March, SMFG has factored in a hit to its bottom line of around 100 billion yen for the current financial year as a result of the tariffs, chief executive Toru Nakashima told a press conference in Tokyo.

Corporate activities such as M&A and capital raising that might have gone ahead from the summer onwards are being delayed and decision making slowed as customers wait to see how the tariff situation develops, Nakashima said.

But the base trend of growth investment and higher wages as Japan emerges from deflation looks set to continue, he added.

Nevertheless SMFG revised down its Japanese GDP growth forecast for this financial year to 0.4% from 1.1% and said it expects no further interest rate hikes.

Last week SMFG announced it would acquire 20% of Indian private lender Yes Bank , marking the latest example of an overseas acquisition by a Japanese financial institutions seeking growth beyond their shrinking home market.

But the tariff uncertainty means SMFG too is holding off on further acquisitions, Nakashima said.

"Now is not the time to do more inorganic acquisitions, while things are still this uncertain we don't have to force it," Nakashima said.

SMFG is the first of Japan's three "megabanks" to announce earnings, with the country's largest lender Mitsubishi UFJ Financial Group and number three player Mizuho Financial Group due to report on Thursday.

($1 = 145.9400 yen)

(Reporting by Anton Bridge, Editing by Louise Heavens, Muralikumar Anantharaman and Toby Chopra)

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