Japanese banks have put themselves on a more solid footing, shown in particular by the performance of Mitsubishi UFJ, but the sluggish economy means their achievements have yet to reach spectacular levels. Writer Brian Caplen

Japanese bank profits are recovering at the same time as the banks are increasing their capital ratios, but they are growing their asset books only very slowly - quite a feat since deleveraging the balance sheet usually causes profits to fall.

Using figures from the total universe of Japanese banks (172) in The Banker database, rather than just the Top 100 in this year's ranking, shows that aggregate profits have increased 274%, while aggregate capital has increased 21% and total assets by a mere 3% for the financial year ending March 2010.

Total profits came to nearly $30bn as opposed to the $17bn loss in the 2009 ranking and sets the sector back on the road recovery, but with still a long way to go to match the $54bn of 2006, the peak year of the last six.

Industry leader Mitsubishi UFJ Financial Group, which with $107bn of Tier 1 capital is considerably larger than the other top three banks, Sumitomo Mitsui (Tier 1 of $65bn) and Mizuho Financial ($63bn), reflects the wider trend in its own performance.

Mitsubishi UFJ impresses

Mitsubishi UFJ's profits are the largest in the sector - a reflection of its size - but even more relevant is that the profits increased in real terms by an impressive 399% over the previous year, at the same time as the asset base only expanded by 8% and Tier 1 capital grew by 39%. Even with such a dramatic leap in profits, Mitsubishi UFJ's profits growth performance in percentage terms was only the fourth highest in the ranking - showing the strength of the Japanese recovery.

Sumitomo notched up an incredible 1524% increase in profits on a similar capital percentage change (of 39% and 8% assets growth) to the figures recorded by Mitsubishi.

The other impressive profit performers in percentage terms were Hachijuni, with 669% real growth, while its Tier 1 capital increased 11% to $4.3bn, putting it at 15th place in the ranking. Bank of Yokohama managed to grow its profits by 453% to $567m, while its Tier 1 capital grew by 15% to $7.5bn.

The fastest movers in the table by Tier 1 growth were Towa Bank with a 91% increase to $780m, putting it in 71st place; Daisan Bank, with an 88% increase to $794m, putting it in 70th place; and Norinchukin Bank with a 73% rise to $41bn, putting it in fourth place.

No high returns

While Japanese bank profits are recovering, Japan cannot really be considered a high return territory for banks. Bank of Okinawa, in 57th place with Tier 1 of $1.12bn, tops the return on assets table, but with only a 0.95% return. Even this is high by Japanese standards and, in fifth place, Shizuoka Bank has a 0.59% return and Keiyo Bank in sixth place has 0.52%.

A similar story unfolds in the top return on average capital table. The top bank, Ashikaga, is an outlier with 27.1% return on average capital. Second-placed Bank of Okinawa has a healthy, but much lower 15.53% return, and by the time Chiba Bank in 10th place is reached the figure has fallen away to 11.6%.

Bank of Okinawa, which performs well in both return on assets and return on average capital ratios, also holds seventh place in terms of real profits growth - 224%. In order to achieve this uplift it grew its assets by 16% and its capital by a slower 13%.

The highest capital-asset ratio in the ranking is held by Aozora Bank with 9.46% - the bank is 13th in the overall ranking with a Tier 1 of $5.2bn. But again, Aozora is an exception and most of the banks in the Top 10 capital assets ratio ranking hover around the 6% to 7% mark.

Japanese banks suffer from the generally poor environment in the country with sluggish growth and deflation. This means that nothing more exciting can be achieved until the broader economy improves.

Top 10 Japanese banks by pre-tax profits, 2010 ($m)

Top 10 Japanese banks by pre-tax profits, 2010 ($m)

Sum of profits of Japanese banks, 2004-10 ($m)

Sum of profits of Japanese banks, 2004-10 ($m)

Top 10 banks by tier 1 growth

Top 10 banks by tier 1 growth

Top return on average capital

Top return on average capital

Top 10 banks by asset growth

Top 10 banks by asset growth

Top 10 by return on assets

Top 10 by return on assets

Top 10 capital-assets ratio

Top 10 capital-assets ratio

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