Japanese Banks Hemorrhage 

SHANE GREEN / Sydney Morning Herald 27may03

[Wall Street Journal article below]

Tokyo—Japan's troubled top seven banks reported a combined record loss of about ¥4.62 trillion ($60 billion) late yesterday, reinforcing warnings from the country's central bank that the world's second largest economy could plunge into crisis at any time.

The world's largest bank by assets, Mizuho Financial Group, lost the most - ¥2.38 trillion, the biggest loss in Japanese corporate history.

Japan's fifth largest bank, Resona - which is being bailed out by the Japanese Government - recorded the next largest loss of ¥838 billion.

Number two bank Sumitomo Mitsui Financial Group lost about ¥465 billion, while number three Mitsubishi Tokyo Financial Group booked a loss of about ¥161.5 billion.

The fourth biggest bank, UFJ Holdings, saw some improvement, with its loss reduced from about ¥1.2 trillion last year to ¥609 billion.

Although generally in line with expectations, the extent of the losses for the financial year ending March is a sharp reminder of the precarious state of Japan's financial system.

The governor of the Bank of Japan, Toshihiko Fukui, recently warned the country faced a crisis at any time "if appropriate solutions to the problems of financial institutions are not carried out".

The losses are primarily due to the decline in the value of the shareholdings held by the banks as the Tokyo stockmarket has gone into freefall, with the Nikkei 225 Stock Average losing almost one third in value over the financial year.

The banks are trying to shed their stockholdings and the Bank of Japan has promised to buy shares worth ¥3 trillion from them.

The losses also reflect the fact that - under pressure from the Government - the banks have begun disposing of the massive bad loans that have crippled the capacity of Japan's ailing economy to grow. The banks also appear to be applying tougher standards following the recent government decision to effectively nationalise Resona.

The Koizumi administration has been forced to pump up to ¥2 trillion into Resona.

Resona, burdened by bad loans and a reduced value in its shareholdings, sought government help after its capital-to-assets ratio fell below the required 4 per cent to about 3 per cent.

In the group's main banking arm, Resona Bank, the ratio had fallen to about 2 per cent.

One of the triggers was a hardline approach by the group's auditors on the amount of deferred tax assets Resona was relying on as capital.

All the banks that reported yesterday did not include large amounts of deferred tax assets. The big banks are also nowhere near the level of Resona's capital to assets ratio.

There were predictions of rebounds by the banks yesterday. But even with fewer shareholdings and reducing bad loans, they will be largely dependent on an elusive pick-up in the Japanese economy and an end to deflation.

After spluttering growth, the most recent GDP figures showed that the Japanese economy was becalmed. Despite growing pressure from within the ruling Liberal Democratic Party, Koizumi administration seems unlikely to formulate a stimulus package.

source: http://www.smh.com.au/articles/2003/05/26/1053801342977.html 26may03

Japan's Banks See Vast Losses, But Say Worst Is Behind Them 

JASON SINGER / Wall Street Journal 27may03

TOKYO -- Japan's top eight banks posted a collective $40 billion in losses, after writing off $43 billion in bad loans, but vowed that after three straight years of red ink, the worst is behind them.

All but one of the banks forecast they would return to profit this year. But their capital -- the money and assets they hold in reserve -- continued to shrivel.

The bad loans and weak stock prices in the fiscal year ended March 31 compounded the effects on the lenders of Japan's 12-year economic slump. The deteriorating health of borrowers and the persistent falling value of assets, including land, has left the industry perilously low on capital. Many banks rely on their holdings of stock in other Japanese companies as a key component of their capital base. As those stock values decline, so does the capital the banks hold in reserve and their ability to lend. Many of the country's biggest banks as a result are nearer to the brink of falling below internationally mandated capital-adequacy standards for doing business abroad.

A further loss in capital could spur the government to use public funds to prop up the banks. Resona Holdings Inc., the country's fifth-largest bank, on May 17 turned to the government for just such a bailout, the first in Japan since 1998.

BANKING ON A REBOUND

Japan's banks are expecting to swing from big losses in the recently ended fiscal year to healthy profits in the current year; in billions of yen.

		    2003   2004
BANK  		 RESULTS   FORECAST  
Mizuho  	  –2,380   220  
Mitsubishi Tokyo    –161   190  
UFJ  		    –609   150  
Sumitomo Mitsui     –465   150  
Shinsei  	      53   65  
Resona  	    –838   N.A.  

Note: Figures are for fiscal years ended March 31 

Source: the banks

Most big banks have been reducing their stockholdings and dumping troubled borrowers at a record pace. Still, some analysts warned that continued falls of share prices could still push several banks over the threshold. "It depends on the stock market," said Hironari Nozaki, a banking analyst at HSBC Securities in Tokyo. Even though all the major banks have made substantial progress selling stockholdings, if the Nikkei 225 Stock Average falls to 7000 or below, more banks could fall into government hands, Mr. Nozaki said. The Nikkei 225 rose 0.5% to 8227.32 Monday.

The Japanese banking system's failing health is a chief reason the world's No. 2 economy -- after the U.S. -- has been unable to get back on its feet after booming growth during the 1980s. Japan's biggest banks as a group incurred losses in seven of the past nine years.

What's more, according to Goldman Sachs, the major lenders have written off the equivalent of 13% of Japan's gross domestic product over the past 10 years. While they struggle to stay afloat, banks haven't been lending the money needed to stimulate the economy. If this year is the turning point, and banks start to post profits, it could have broad implications for the economy, as fresh funding could enable smaller industries to expand and grow, economists say.

Some promising signs have started to emerge. Mizuho Financial Group, the world's largest bank by assets, reported a net loss of ¥2.38 trillion ($20.36 billion), the biggest in Japanese corporate history. But the bank is reducing its reliance on controversial deferred tax assets, which are credits that can be used to offset taxes on future profits and count as capital on the balance sheet. It also announced that it will start paying a dividend again this fiscal year, after having skipped a payout last year.

UFJ Holdings Inc., one of the four biggest banks, narrowed its loss to ¥609 billion from ¥1.2 trillion a year earlier.

Mitsubishi Tokyo Financial Group Inc. reported a net loss of ¥161.5 billion; Sumitomo Mitsui Financial Group said its loss amounted to ¥465.4 billion; Sumitomo Trust & Banking Co. had a loss of ¥72.97 billion; Mitsui Trust Holdings Inc. posted a loss of ¥96.7 billion; and Resona's loss was ¥837.6 billion. Resona didn't announce a forecast for this year because it is still writing a restructuring plan after the government bailout, but the rest of the banks predicted they would be profitable this year.

Another potential bright spot was the performance of Shinsei Bank Ltd., the first Japanese lender taken over by foreigners. Shinsei, the product of the purchase and revival of the former Long-Term Credit Bank of Japan, which failed and was nationalized in 1998, before it was sold, posted its third-straight year of profit.

The bank has reduced bad loans to about 5.7% of total loans from 20% in September, and said that as of the end of March, it has "virtually finished resolving its bad asset" problems.

Shinsei has continued to push into more lucrative fee-based income from providing investment-banking services, such as advising on mergers and acquisitions and arranging the sale of securities. Selling those services is less risky than lending because it doesn't require tying up capital that borrowers could have trouble repaying in the future. Other Japanese banks have latched onto this notion and are also driving to increase fee-based businesses. Investment banking and other fee-based income increased to 40% of Shinsei's total revenue, and the bank said it aims to have fee-producing businesses contribute half of its earnings this year.

One downside: Shinsei has the opposite problem from its capital-starved competitors. The bank posted a ratio of capital to assets of 20.1%, a level it has said it would like to see reduced by expanding and lending more. Most other big Japanese banks doing international business have a capital ratio that is only slightly higher than the 8% required minimum.