Banks overconfident on subprime appraisals

by Hiroki Tanemura and Shinya Ajima

Kyodo News

While modesty has long been seen as a virtue in Japan, the nation’s major banks appeared to break free of the cultural constraint recently as they claimed that the worst of the subprime mortgage crisis is almost over — at least for them.

However, the declarations by the top Japanese financial institutions, which analysts and regulators say are much less exposed to investments linked to the unsettled risky home loan market in the United States, came as tough times continue for their bigger U.S. and Europeans rivals.

Some believe the Japanese claims are premature because foreign institutions could post further subprime-related losses and investors in global financial markets are a long way from recovering their confidence.

The major Japanese banking groups’ earnings for business 2007 released this month actually showed they are not immune to the subprime crisis and the resulting global credit crunch.

Japan’s top six groups’ combined subprime-linked loss expanded to ¥945.5 billion at the end of March, more than three times the amount estimated six months earlier.

“In Japan, we have unfortunately become top for something we should never brag about. It’s really embarrassing,” Terunobu Maeda, president and chief executive officer of Mizuho Financial Group Inc., told reporters.

Mizuho, the country’s third-biggest bank in terms of net profit and the worst hit among the six by the crisis, posted a ¥645 billion subprime-related loss for the year through March, largely affected by a loss at its brokerage arm. The amount was up from ¥345 billion recorded in December and ¥70 billion in September.

“There are a lot of lessons we should learn,” Maeda said.

Separately from the six groups, Shinsei Bank, the failed predecessor of which was turned around by foreign capital nearly a decade ago, returned to profitability due to a one-off profit from the sale of its headquarters building.

But the bank’s pretax profit declined by half from a year earlier and the bank entered the spotlight for a different reason than the other banks.

Shinsei announced that Masamoto Yashiro, 79, its former chairman, will reassume the post, two years after he stepped down citing “old age.”

“I have to say he is the youngest 79-year-old I have ever met in my life,” Shinsei President Thierry Porte said at a news conference — a comment that fueled speculation that the bank is in distress.

As for the impact of the subprime crisis, the top executives of the major banks expressed relatively optimistic views.

“We don’t expect the things that have happened over the last six months to happen again,” Nobuo Kuroyanagi, president of Mitsubishi UFJ Financial Group Inc., told reporters.

MUFG, Japan’s largest bank, said it witnessed a serious deterioration in its balance sheet in the quarter through March.

Kuroyanagi said the group’s additional subprime-linked loss could remain at around ¥30 billion after it posted a ¥123 billion loss in business 2007.

Teisuke Kitayama, president of Sumitomo Mitsui Financial Group Inc., said, “Even if there is an impact, it would be very limited” in the future. The second-biggest bank recorded a ¥93 billion subprime-linked loss.

Financial regulators are echoing such views, while the Bank of Japan has stressed that there has been no serious threat to the country’s financial system so far.

The Financial Services Agency, Japan’s financial watchdog, has said Japanese banks are not faced with an immediate need to raise fresh capital.

“Unlike European and U.S. financial conglomerates, which have booked ¥3 trillion to ¥4 trillion in losses, Japanese financial institutions could absorb their losses with their own operating profits,” FSA Commissioner Takafumi Sato said.

However, pessimistic views are not wholly absent. One scenario sees the global financial market taking a longer-than-expected time to recover its stability, with foreign banks revealing further losses that result in spillover effects that hurt Japanese banks.

In March, a major U.S. investment bank secretly approached a few leading Japanese banks about boosting its capital in exchange for talks on a possible business alliance in Asia, sources said.

But the Japanese banks turned down the request, ruling out participation in such an emergency operation at that time, the sources said.