(Bloomberg) -- Mitsubishi UFJ Financial Group Inc. shares fell after Japan’s biggest lender unveiled a smaller-than-expected buyback despite record earnings. 

MUFG and Sumitomo Mitsui Financial Group Inc. said they plan to buy back about 100 billion yen worth of their own shares. SMFG also plans to raise its dividend by 60 yen to 330 yen per share. Mizuho Financial Group Inc. will not do a share buyback until it has built up sufficient capital reserves for investing in its growth strategy, according to Chief Executive Masahiro Kihara.  

MUFG shares fell as much as 5.6% on Thursday, the most in more than six months. Mizuho shares were down as much as 2.5%, the most in more than six weeks. SMFG shares meanwhile rose almost 2% in Tokyo trading. 

SMBC Nikko Securities’ analyst Masahiko Sato said the size of MUFG’s share buyback is “a negative surprise,” while Citigroup Inc.’s analyst Koichi Niwa said “our shareholder returns expectations were apparently overly high” for MUFG.

The decline in MUFG’s and Mizuho’s stocks helped drag down a measure of Japanese banks on the Topix index as much as 2.7%, the most since April 1.

Sentiment was also hit with latest data showing that Japan’s economy shrank in the first quarter as consumers and companies cut spending. This complicates the picture for the central bank as it mulls the timing of its next interest rate hike.

It also clouded what was a sparkling set of results from the country’s biggest lenders, which had predicted reaping combined record profits of more than 3.3 trillion yen ($21 billion) for the year started in April. 

MUFG, Japan’s largest lender, expects net income of 1.5 trillion yen, a 0.7% increase from the previous year. SMFG aims for a 10% increase to 1.06 trillion yen and Mizuho expects profit to gain 10.5% to 750 billion yen. 

The banks are benefiting from an earnings boost following the Bank of Japan’s shift in March. Big banks, including the three, have about 200 trillion yen at the central bank reserve and with the annual 0.1% interest on the amount beyond the minimum requirement, they earn about 200 billion yen. 

MUFG Chief Executive Hironori Kamezawa said the bank was helped by changes it made to its business model during the years of negative interest rates. The company increased fee businesses and cut costs. The bank also benefited from the weak yen because of its expansion overseas. 

“We had really strong results,” said Kamezawa. “The structural reforms of the past couple of years bore fruit.” 

MUFG plans to sell about 350 billion yen in so-called strategic holdings over the next three years.  

Japanese Banks Will Get Earnings Bump From Deposits at BOJ 

At SMFG, net income surged more than fourfold to 170 billion yen, in the fiscal fourth quarter ended in March. Earnings were helped by strong loan demand, driven by a pickup in corporate client activity. Mizuho’s fourth-quarter net income more than tripled to 36.7 billion yen. 

“Everything worked favorably for the banking business,” SMFG Chief Executive Toru Nakashima said at a briefing.  

The end of the BOJ’s negative rates policy is estimated to raise SMFG’s net interest income by 40 billion yen and it will gain another 40 billion yen for each increase of 10 basis points in the policy rate. Mizuho said the end of negative rates is projected to add a net 45 billion yen to its profit. 

--With assistance from Russell Ward and Patrick Winters.

(updates with stock moves, analysts’ comments throughout)

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