Saturday, December 4, 2004
Fitch ups ratings of top Japan banks
Barney Jopson / Tokyo December 04, 2004
Three leading Japanese banks saw their credit ratings upgraded for the first time in almost two years by Fitch today.
But in spite of significant progress in banks' bad loan disposals, the ratings agency said its move reflected the government's ability to prop up lenders rather than greater financial resilience in the sector.
"The ratings are going up because of improvement in the support environment, " said Brett Hemsley, director at Fitch. "Banks really have a long way to go in terms of improving individual performance."
Fitch raised its ratings on the core units of Mizuho, SMFG and UFJ to A- minus from BBB-plus, taking them back to the levels they were at before anxiety about possible financial meltdown peaked in early 2003. MTFG was already at A- minus.
Explaining its decision, Fitch said Japan's government, compared with 18 months ago, was more willing and better able to provide support if a big lender fell into trouble, for two reasons.
First, the proposed merger of MTFG and UFJ would leave three dominant groups controlling half of the bank loan market, rendering the possibility of a failure among them unacceptable.
Second, any difficulty was likely to be contained within one institution and would not trigger a systemic crisis -thought to be possible as recently as 2003-that would stretch state resources.
Japan's biggest lenders have made big strides in cutting bad loans in the past two years, with UFJ the only one of the big four not to have met a 2005 government loan reduction target ahead of schedule.
But Fitch, which follows international standards in measuring the likelihood of institutions defaulting, highlighted the continued weakness of banks' capital bases and their low profitability.
"Although there has been some improvement in the individual financial performance of all these banks, none of them, not even MTFG, are at a level that warrants an A rating on its own," said Hemsley.
Banks still owed funds to the government from a round of bail-outs in the late 1990s, he noted, and some still relied too much on deferred tax assets- credits on future taxes-to boost their capital.
Equity investors, focusing on profits rather than default risk, have been more upbeat on banks than ratings agencies, pushing the Topix sector index up 120 per cent since last April.
Although lending across the sector continues to fall, Mizuho, SMFG and MTFG have been able to move back into profit and strengthen their capital bases by getting through the worst of their bad loan disposals and reaping gains in the stock market.
Reflecting the improvement, Fitch upgraded the individual ratings of Mizuho and SMFG's core banks. UFJ, which remains in the red and has sought salvation through a merger with MTFG, was left unchanged.
Capital in the banking sector was depleted as loan loss charges ballooned beyond profits, forcing lenders to dig into their capital bases to cover the costs.
"It will still take another two or three years for them to get what we would consider an internationally comparable, sound capital structure," Hemsley said.