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Japan's banks get
well
TOKYO - Japan's
banking industry has entered a new phase of
recovery, with the decade-long process of
disposing of bad loans from the bubble period
almost complete. Proving that every dark cloud
does indeed have a silver lining, the major banks
are using the know-how they accumulated in the
process of recovering or renouncing delinquent
loans to their troubled borrowers to diversify
into the corporate turnaround business.
Overseas, Japanese bankers are expanding
lending to emerging economies, notably to the BRIC
countries (Brazil, Russia, India and China). But
the new optimism should still be taken with a
grain of salt, because capital adequacy ratios at
Japanese financial institutions are still weaker
than those of lenders in the US or Europe. Risk
management at Japanese banks still leaves much to
be desired, banking industry observers point out.
But so far, things look good for Japanese
banks. Japan's seven largest banking groups are
estimated to have posted a combined consolidated
net profit of 600 billion yen (US$5.5 billion) for
the business year ending March 2005, the first
aggregate net profit in four years. This earnings
recovery is attributed to a 43% drop in losses
from bad loan disposal at these banking groups, to
some 2 trillion yen.
Problem loans as a
percentage of total lending are believed to have
declined to 2-3% at each group, well below the
target of less than 5% set by the government, with
the balance of such loans falling below 2 trillion
yen for each group. The combined amount of bad
loans is estimated to have decreased to some 8
trillion yen, from the peak of 27 trillion yen
recorded in fiscal 2001.
Of the major
banking groups, Sumitomo Mitsui Financial Group
Inc (SMFG) and UFJ Holdings Inc sustained
disproportionately large losses of 950 billion yen
and 970 billion yen, respectively, in fiscal 2004
from bad loan disposal. In early March, SMFG
relinquished loans worth 80 billion yen as part of
the financial reorganization of general contractor
Fujita Corp. Sumitomo Mitsui Banking Corporation
(SMBC) is Fujita 's largest creditor, with lending
totaling about 100 billion yen, and as of
September 31, Fujita's interest bearing-debts were
assessed at 181.6 billion yen. Besides Fujita,
SMBC has been busy with the financial
restructuring of two other debt-strapped general
contractors - Kumagai Gumi Co and Mitsui Sumitomo
Construction Co.
UFJ has been accelerating
the removal of bad loans from its books by
collecting or writing off these loans prior to the
merger with Mitsubishi Tokyo Financial Group Inc
slated in October. Capital adequacy ratio at these
banking groups now stands at 9-12%, higher than
the minimum of 8% required for banks with
international operations.
While they are
freeing themselves from the fetters of
non-performing loans, these banks are entering the
business of corporate turnaround, fully making use
of the know-how they have acquired in the process
of rehabilitating debt-laden corporations. Mizuho
Corporate Bank, the investment banking unit of
Mizuho Financial Group Inc, has reaped a handsome
profit from selling the preferred shares of
financial service company Orient Corp to trader
Itochu Corp after two years of rehabilitation of
Orient. The bank also sold part of its
shareholding in Isuzu Motors Corp to another
trading company, Mitsubishi Corp, after Isuzu
staged a recovery.
On the overseas front,
Japanese banks are increasing lending to the
emerging economics of Brazil, Russia, India and
China, with balance up 40% year-on-year at $20.25
billion as of December 31, according to Bank of
Japan statistics. The balance of lending to China
was $14.06 billion, up 40%, followed by $2.85
billion to Brazil, up 10%. The loan balances for
India and Russia each grow 60% to $1.82 billion
and $1.52 billion respectively.
Outlook
By fiscal 2007, about 30 Japanese banks
are expected to reevaluate their lending in the
light of new capital adequacy standards to be
issued by the Bank for International Settlements.
Despite the progress in bad loan disposals and
rehabilitations of borrower corporations, however,
these banks will still be lagging behind US and
European lenders when seen under the new BIS
requirements of computing capital-risk asset
ratio.
Under the new BIS standards,
different risk weights will be assigned to loans
according to the creditworthiness of the
borrowers. Lending of 100 million yen to a sound
borrower, for example, could be assigned to a risk
weight of 20%, which lowers the size of the
denominator of the capital adequacy ratio formula
to 20 million yen. On the other hand, the same
amount of loan to a riskier borrower must be
multiplied by a high risk factor, 150% for
example, and this will increase the denominator to
150 million yen.
Under the new BIS
standard, banks must exercise rigorous risk
assessments for their lending and separate
creditworthy borrowers from riskier ones. It has
been said that Japanese banks' internal credit
assessments are less detailed compared with their
US and European counterparts. US and European
banks possess extensive empirical data on various
credit instruments, including loans, corporate
bonds and credit lines. A BOJ official warned that
adoption of rigorous risk assessments from the new
BIS standard could lower the capital adequacy
ratios at Japanese banks.
(Asia
Pulse) |
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