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Japan banks out of the woods

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Japan banks out of the woods

By Matthew Rusling
Jun 21, 2005

OSAKA - In what could be an end to a decade-long problem, all seven major Japanese banks have recently achieved the government-set goal of slashing their non-performing loans.

"We continue to believe that we should be realistically positive on the major banks. There may not be a massive amount of organic growth potential in the short term, but net profits are set to continue to report new highs," said Goldman Sachs Japan in a recent report.

Indeed, Mizuho Financial Group Inc, Mitsubishi Tokyo Financial Group Inc, UFJ Holdings Inc and Sumitomo Mitsui Financial Group Inc, as part of a government mandate, have cut in half their ratio of non-performing loans from fiscal 2002 levels. Sumitomo Trust & Banking Co, Mitsui Trust Holdings Inc and Resona Holdings Inc also managed to reach the same target.

Goldman Sachs reports that non-performing loans (NPL) for major banks have fallen to 7.7 trillion yen (US$70.76 billion) as of March 2005, after peaking in March 2002 at 27.2 trillion yen. By March 2006, the investment bank reckons this number will fall to 5 trillion yen. Given the banks' track record for failing to meet the mark in recent years, skepticism would seem a natural reaction. But independent experts say there is no reason to dismiss positive forecasts. "Their announcements are credible," said Toru Umeda, of Transparency Japan, an organization that tracks corporate and political corruption.

Experts say the banks' success in getting rid of bad loans, as opposed to previous, unsuccessful attempts, can be attributed to several factors. "The economic environment has improved, as we have had an economic expansion for over three years, and land prices in at least some areas have begun to rise. This has reduced the number of new bankruptcies and allowed some NPL to be reclassified as performing loans (PLs) on the basis of better expected profit performance," said Peter Morgan, chief economist at HSBC in Japan.

Morgan also credited the regulatory environment. "First, the FSA (Financial Services Agency) became more aggressive in forcing banks to reclassify more loans as NPLs and build more reserves against it. This led to a substantial upward revision of the amount of NPLs of major banks in March 2002 (from 20 trillion yen to 28.4 trillion yen). After that, other regulatory changes actually made it easier for banks to lower NPLs. For example, any loan to a company taken on by the IRCJ (Industrial Revitalization Corporation of Japan) could immediately be reclassified as a PL."

It has been a long and hard road for Japan's banks. Their problems started as a result of the bubble that popped in the early 1990s. When stocks and real estate values started to sink, the country's financial system was severely affected. Bad loans throughout the financial system, together with the collapse in real estate values, caused banks to spiral into financial turmoil. Subsequently, the banking industry has often the focus of a good deal of negative press.

One major issue following the bubble's burst was the government's habit of propping up failing banks. But while some economists and financial news publications harshly upbraided the Japanese for this, others viewed it as necessary. "The bailout projects helped prevent the Japanese economy from going into real crisis. In that sense they helped," said Umeda.

Long after the bubble burst, Japanese banks had also incurred criticism for continuing to loan to unprofitable businesses. But now, experts say, this practice is lessening. "Loans to zombie companies are still large, but falling," said Morgan. "They are being tackled, albeit in a rather slow fashion, by handing these firms over to be restructured by the IRCJ."

The key problem now, said Morgan, is that loan demand remains weak. "This is because firms, especially large firms, have high levels of cash flow as a result of balance sheet restructuring, and, for the most part, can easily fund their capital spending requirements out of this cash flow."

Most agree that banks will return to a period of growth. While profit may not come overnight, experts say there is reason to be positive in the long term. Goldman Sachs said a lot depends on interest rates. If interest rates do not rise, major banks are expected to perform in line with the market. "We expect that the five-year annualized growth rate will rise to 7.3% if short-term interest rates rise to 0.5% ... Since we expect interest rates to rise, our coverage view for the major banks is attractive."

atimes.com
 
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