Losses of Japanese banks [may] point to reform

Financial Times ^ | May 25 2003 22:01 | By David Ibison in Tokyo

[DeaconBenjamin]

Japan's four largest banks will on Monday report combined net losses of about ¥3,600bn ($30.8bn) as scrutiny of the sector hits an all-time high after the ¥2,000bn government bail-out of Resona, the country's fifth-largest bank.

Mizuho will announce a net loss of ¥2,380bn, SMFG ¥470bn, MTFG ¥185bn and UFJ ¥650bn as a result of losses on bad loans and exposure to the stock market, according to forecasts released by the banks.

In spite of the enormous losses, the banks' results are seen in some quarters as a positive development because they reflect a new-found ability to admit to the true scale of their problems after years of obfuscation.

Mizuho, the world's largest bank by assets and long considered the most reluctant to change of Japan's lenders, will announce tomorrow measures that demonstrate it is engaged in the process of implementing reform.

Figures seen by the Financial Times reveal it will have increased its reserve ratio for loans that require special attention to 38 per cent compared with 18.7 per cent in September 2002 - the highest of the four banks.

Its bad loan balance will be ¥4,700bn, a decrease of ¥70bn compared with March 2002, while its use of deferred tax assets will have been reduced to ¥1,970bn, a decline of ¥300bn from March 2002, bringing the percentage of DTAs to Tier 1 capital to under 50 per cent.

Mizuho will also say on Monday that it has a capital adequacy ratio of 9.53 per cent - above the regulatory minimum of 8 per cent stipulated by the Bank for International Settlements.

It was an over-reliance on the DTAs to boost capital that eventually led to Resona's bail-out. About 77 per cent of its Tier 1 capital was attributed to the controversial tax credits.

In spite of the decision by the four mega-banks to finally address their core weaknesses, fundamental problems remain that threaten to undermine the sector no matter how many changes the banks put in place.

There are substantial pressures on operating earnings. More than 70 per cent of net revenues are generated from net interest income and the banks have been trying - but failing - to widen net interest margins.

The proportion of loans paying below the short-term prime rate rose from 6.9 per cent in 1995 to 14 per cent in 1999 and 25 per cent in 2002.

All four banks are also slaves to the future direction of the stock market. Jason Rogers, analyst at Barclays Capital, estimated that, if the Topix index fell to between 700 and 750 points, unrealised losses on the banks' equity portfolios would be about ¥6,500bn, taking average Tier 1 and total capital ratio well below the regulatory minimum of 8 per cent.

[DeaconBenjamin]

Boy, FT's putting some serious spin in this article.

[Beck_isright]

No big deal. All their tee times in Hawaii and Vegas are still safe. When the Japanese banks lose those, then you know it's TSHTF time.