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Japan banks out of the
woods
By Matthew Rusling
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."
Matthew Rusling is a freelance
writer in Osaka. He can be reached at
mjrjapan@yahoo.com
(Copyright 2005
Asia Times Online Ltd. All rights reserved. Please
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