Banks’ overall downturn in performance, despite Japan’s economic growth, signals a rough road ahead.

Aggregate pre-tax profit for The Banker’s latest listing of the Top 100 Japanese Banks, based on results for fiscal 2006 (year-ending March 31, 2007), showed a downturn of 6.8% from fiscal 2005 in spite of moderate growth in the Japanese economy. Fiscal 2005 was an all-time high point from the perspective of Japanese bank profits, and against that five banks in the ranking recorded pre-tax losses, two more than in last year’s listing, and a further 40 showed profit downturns.

According to the Bank of Japan, a good first half of fiscal 2006 for the six major (formerly ‘city’) banks was offset by poorer performance in the second half as credit costs increased and devaluation of equity investments occurred, caused by a downturn in the business of consumer finance companies. For the 84 regional banks, the decline was attributable to large loan loss provisioning at some banks. Net interest income remained firm while non-interest income, certainly for the major banks, was enhanced by the write-back of provisions for non-performing loans (NPLs).

The Top 100 listing is again headed by the Mitsubishi UFJ Financial Group. The six major banking groups dominate the top 10 with Norinchukin Bank (the Central Bank of the Agricultural, Forestry and Fisheries Co-operatives) at number four; another co-operative central bank, Shinkin Central Bank, at seven; Aozora Bank at eight; and Shoko Chukin Bank (the Central Co-operative Bank for Commerce and Industry) at 10. The highest ranking regional bank in the listing, Bank of Yokohama, comes 12th.

The list is made up of the six major bank groups, 84 regional banks and 10 other banks. The latter group includes the three central banks mentioned above, five individual shinkin banks and the two former long-term credit banks, Aozora and Shinsei.

Downward mover

Shinsei Bank, which was at 10 last year, moves down to 11 this year following a 15.9% decrease in Tier 1 capital, in part due to a share buy-back policy and in part due to its pre-tax loss of $559m. It has been realigning its business focus from that of a long-term credit bank, where it was predominantly involved in corporate lending, to providing retail/investment services. As part of this, it has acquired consumer finance companies and it is on these that it suffered impairment losses on goodwill along with increased credit costs, which affected profits.

Aggregate Tier 1 capital for the Top 100 was $332.6bn, up 3.8% on the previous year, and aggregate assets were $7502.9bn, up only 0.3% on the previous year. The six major banks accounted for 51.7% of the aggregate Tier 1 capital, 56.8% of aggregate assets and 68.7% of aggregate pre-tax profit; while the 84 regional banks contributed 32.2% of aggregate Tier 1 capital, 29.0% of aggregate assets and 22.3% of aggregate pre-tax profit.

NPLs improve

NPL levels continue to improve as banks move bad loans off their balance sheets. Average disclosed ratios of gross NPL to gross loans averaged 1.74% for the major banks, 4.44% for the regional banks and 3.43% for the catch-all ‘Others’. There is a wide variation in individual NPL figures for the regional banks because the pace of loan book reform at some banks is more moderate.

Based on the declining profit figures for the six major banks for the first half of fiscal 2007, published in the January issue of The Banker, it is expected that the second half of fiscal 2007 is going to be an even harder road for Japan’s banks and economy, even if the US avoids recession.

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