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Losses recede but Japan still lags far behind other regions

Japan’s banks continue to make steady progress back to health, and many would argue that the big banks are already there. With an aggregate pre-tax profit of $51.3bn, the Japanese banking sector has surpassed last year’s $32.4bn, and left 2003’s pre-tax losses of $39.3bn a distant memory.
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Japan’s banks account for 11.2% of the Top 1000 total Tier 1 capital (at $31.8bn, up from 11.1% last year) and, with combined assets of $759.5bn, they account for 11.9% of total assets (slipping slightly from 13.2% last year).

However, they are still nowhere near as profitable as competitors in, for example, the US, Latin America and the Middle East. Their combined return on assets is only 0.68%, compared with 1.96% in the US and 2.84% in Latin America. In terms of return on capital, Japanese banks’ aggregate score of 16.4% lags behind every other region but particularly Latin America, which racks up 33.24%.

Even while Mitsubishi UFJ Financial Group (up two places to fifth in The Banker’s Top 1000 following last year’s merger) has driven up profits on average capital by almost 10 percentage points (from 16.1% last year to 25.5% this year, based on Mitsubishi’s 2005 figures), it still cannot touch Citigroup (ranked first) at 38.9%, Banco do Brazil at 47%, or Al Rajhi Banking & Investment Corporation’s 51.2%.

Japan’s non-performing loans (NPLs) have also been reduced to respectable levels, at least at the major banks. Mitsubishi UFJ’s NPLs are 2.3% of its total loans, Sumitomo Mitsui’s are 2.2% and Mizuho’s are 1.61%. All compare comfortably with HSBC’s 1.74%, Credit Agricole’s 2.8% and UniCredit’s 4.9%, for example.

Seven of Japan’s top 25 banks have less Tier 1 capital than last year, including Mizuho Financial Group, though, in large part, this is due to movements in the dollar/yen exchange rate. Perhaps more revealing as a measure of the greater growth and profitability of banks outside of Japan, 12 of Japan’s banks have gone down in the world ranking.

The headline-grabbing story is Mitsubishi UFJ. Since the merger, the bank has driven up pre-tax profits by 129%. In merging two of the former top five Japanese banks, it has grown the combination of last year’s Tier 1 capital ($39.9bn from Mitsubishi and $21.5bn from UFJ) by $2.4bn to create a bank more than a third bigger than its nearest domestic rival, Sumitomo Mitsui Financial Group. The merger has also opened the way for a new entry to the top 25, Nishi-Nippon City Bank, in at number 24 with $2bn in Tier 1 capital. Mizuho Financial Group, meanwhile, has been pushed down another place in the domestic table to third.

In the global ranking, Sumitomo has risen by seven places from 15th to eighth – increasing its Tier 1 capital by an impressive 42.4%, while Mizuho has slipped one place to ninth. Further down the ranking, Norinchukin Bank and Resona Holdings have both climbed a little higher to 32 (from 35) and 50 (from 54), respectively.

Shinsei Bank, the result of a Western-style leveraged buyout led by US private equity firm Ripplewood, continues to be a success story. Moving up 28 places in the world rankings to 100, it has grown its Tier 1 capital by 59.4% to $6.2bn and its assets by 13.8% to $69.2bn. Shinsei’s profitability, however, even lags behind many of its Japanese rivals, with return on average capital of only 12.3%.

Resona Holdings, too, is looking much happier. Tier 1 capital is up by 19.5%, assets have grown by 44% and, although pre-tax profits have only risen by 3.3%, it has maintained a very respectable return on average capital of 30.7%.

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