Friday, November 26, 2004
Japan banks recover from NPAs, but still under strain
REUTERS
TOKYO: Japan's big banks have finally shaken off a decade-long bad-debt crisis that threatened the country's financial system,weighed on the economy and drew criticism from the US and other tradingpartners.
But first-half results released this week showed that profits from lending and other core operations remain weak, posing a serious challenge to banks' recovery efforts.
On the whole, Japanese lenders, such as Mizuho Financial Group, Mitsubishi Tokyo Financial Group (MTFG) and Sumitomo Mitsui Financial Group (SMFG) have returned to health thanks to an economic upswing that has shored up shaky borrowers and opened the door to a faster bad-debt purge.
Dud loans at Japan's seven major bank groups fell to an average of 4.4% of all lending at the end of September from 5.6% in March and a peak of more than 10% at the start of the decade.
All banks, except UFJ Holdings, the laggard No 4 bank, were six months early in clearing a government target to reduce bad loans to half their '02 levels by next March.
"We are cutting the loans that need to be cut, and the number of creditworthy borrowers is increasing," said Terunobu Maeda, president of No 1 lender Mizuho. His bank's bad loan ratio fell to a comfortable 3.1%, the lowest of Japan's four top-tier lenders.
But Maeda acknowledged that Mizuho's profitability has suffered, as poor demand for traditional corporate loans keeps lending margins wafer-thin - a sentiment echoed by other banks.
"I don't expect demand for loans to rise in the current business environment," UFJ president Ryosuke Tamakoshi said. "Demand probably won't improve much in the second half," he added.
UFJ was the only bank to post a half-year loss, as it wrote off billions of dollars worth of bad loans ahead of a planned takeover by second-ranked MTFG next year, which would create the world's biggest bank by assets.
UFJ's bad-loan ratio remained well above that of its peers at more than 9%, although Tamakoshi pledged to lower the figure to less than 4% by the end of March.
"The overall picture is that banks' are struggling to raise their core earnings power, but financial fundamentals are improving," said Hironari Nozaki, an analyst at Nikko Citigroup.
As the bad-loan crisis fades, the question of profitability, long far below that of American and European banks, is returning to the fore. Japan's top bank by assets, Mizuho, squeezes out just a fifth of the return on assets of world leader Citigroup and a third of Britain's HSBC Holdings.
First-half net profits fell at the top four lenders, which missed the hefty securities-trading gains and other one-off factors that boosted their bottom lines a year ago.
Core operating profits, a key gauge of basic earning power, declined at a number of banks, most notably Mizuho, which has struggled more than others to open up new business lines.
Mizuho projected full-year core operating profits would fall more than 14% from the '03-04 level, casting a shadow over its impressive asset-quality improvement.
"Each bank's special weaknesses were highlighted in the mid-term results," Nikko Citigroup's Nozaki said.
Banks that need to improve earnings power include Mizuho, MTFG, Resona Holdings and Sumitomo Trust & Banking, he said.Conversely, UFJ and SMFG need to beef up their balance-sheet fundamentals. Seventh-ranked lender Mitsui Trust Holdings is roughly in balance, he said.
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