Nine of the nation’s 10 city banks managed to post pretax profits in the year that ended March 31, thanks to their progress in disposing sour loans, according to business reports released May 23.

Of the 10 banks, only Dai-Ichi Kangyo Bank fell in the red, logging pretax losses of 349.8 billion yen for fiscal 1996. The results indicate that the majority of the nation’s biggest commercial banks seem to have begun overcoming the nightmare of fiscal 1995, when seven of the city banks posted pretax losses after writing off massive amounts of bad loans. Together, the 10 banks registered pretax profits of 2.3 billion yen and net business profits of 2.6 trillion yen.

The Bank of Tokyo-Mitsubishi released its first earnings report since its formation through the merger of Bank of Tokyo and Mitsubishi Bank. Its pretax profits decreased to 94.7 billion yen, down from the combined pretax profits of the two banks in fiscal 1995.

However, the government’s prolonged low-interest policy and a sluggish bond market brought down net business profits at all 10 banks. In fiscal 1995, total net business profits at the city banks soared to a record high of 3.499 trillion yen as they made use of low interest rates to secure profits through interest margins.

Most banks predicted that their business profits would not increase during the current fiscal year, with many expecting authorities to raise interest rates in the latter half of the business year. The banks said they would continue to carry out restructuring efforts to make operations more efficient, such as trimming their workforces and reducing the number of branches.

But it remained unclear how the banks plan to increase their competitiveness as the government-proposed “Big Bang” of financial system reforms progresses in coming years. The reform program, which aims to boost the attractiveness of Tokyo’s financial and capital markets by scrapping a wide range of regulations, is expected to lead to a realignment of domestic financial institutions.

Some bank executives said they would seek ways to increase revenue from commissions in such relatively undeveloped areas as telephone banking. Katsuhito Sasajima, senior financial analyst at Nikko Research Center, said that while the city banks’ earnings reports were fairly good at face value, in fact the banks’ physical strength is being sapped from their efforts to dispose of their bad loans. “These banks were highly dependent on utilizing their so-called hidden assets in order to secure the funds to write off their nonperforming loans” during the fiscal year, he said.

“Business reports for the current business year will be the ones to really watch for” in determining the real health of city banks, he said, since the weaker institutions would be lacking in even hidden assets to brush up their earnings after fiscal 1996. The city banks all said they had not yet made a formal decision on whether to assist the ailing Nippon Credit Bank in its restructuring efforts, but most indicated that they were leaning toward lending a hand.

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