Bad loans continued to make a dent in major banks’ profits in fiscal 2000, even as the heat intensified to get to the bottom of the problem, according to fiscal earnings reports announced by Friday.
Two of four major banking groups suffered pretax losses in while the third, Mizuho Holdings, also suffered a sharp drop in the growth of pretax profits, as they continued to set aside loan-loss reserves aggressively.
Pretax profits of Mizuho Holdings rose a meager 2.2 percent to 581.4 billion yen. It managed to eke out a consolidated net profit of 211.3 billion yen, by aggressively selling share holdings, even as Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan wrote off 851.9 billion yen for nonperforming loans.
The UFJ group meanwhile reported consolidated pretax losses of 270.1 billion yen, after writing off 1.2 trillion yen for nonperforming loans.
These compared to previously announced pretax losses of 114.3 billion yen at the Mitsubishi Tokyo Financial Group, after problem loan writeoffs climbed to 805.6 billion yen.
The two banks that merged to form Sumitomo Mitsui Banking Corp. said combined pretax profit was 494.6 billion yen, up 32.2 percent but still lower than initial projections. The fall came after the two banks wrote off 992.8 billion yen of problem loans, almost 50 percent higher than expected.
Despite banks’ efforts, however, new loans to bankrupt firms or those facing imminent bankruptcy sprouted faster than banks could write them off.
Newly arising loans to companies in the worst straits at Mizuho totaled 673.9 billion yen during the six months from October to November, keeping pace with the 720.7 billion yen Mizuho’s three banks managed to write off in so-called final disposal.
Bad-loan writeoffs include both loss reserves set aside for risk loans and selloffs of collateralized properties to settle losses. Banks conduct final disposal through collateral sales, debt forgiveness or transferring loans to a third party.
The government has pledged to direct banks to write off problem loans as losses and erase them from their balance sheets within three years.
Newly arising loans catego
rized in the worst slots amounted to 887.1 billion yen at the Mitsubishi Tokyo Financial Group, outpacing the 412.9 billion yen that banks were able to erase from their balance sheets.
The three banks at UFJ – Sanwa Bank, Tokai Bank and Toyo Trust & Banking Co. – removed 862.4 billion yen of delinquent loans from their balance sheets, but the loans to bankrupt or near-bankrupt firms kept close behind, at 729.8 billion yen.
Only SMBC was able to outpace these loans, putting 1.4 trillion yen of these loans off their balance sheets while incurring 707.3 billion yen new loans during the second half of the fiscal year.
“In hindsight, it’s hard not to say that risk-assessment may have been lax in the past,” said Minoru Machida, managing executive at Mizuho Holdings.
Bank officials had repeatedly said that the worst of the bad loan scenario was over.
“I have to admit that bad loans continue at an extremely high pace,” Machida said.
Banks face further challenges. Beginning this business year, banks will switch to new accounting rules under which they will be obligated to show a portion of unrealized losses for cross-held shares on their balance sheets.
They have therefore tried to speed up sales of cross-held shares, to reduce their vulnerability to stock market fluctuations.
Such moves are likely to meet fierce resistance on the part of corporations.
“Banks have to be doctors to ailing companies, their patients,” said Masayuki Oku, senior managing director of SMBC. “They need to be able to be strict with their patients so that they recover.”
Twice, major banks collectively crawled to authorities for injections of public money, totaling 7.45 trillion yen by 1999, to strengthen their capital bases.
The Financial Supervisory Agency chief at the time, Hakuo Yanagisawa, vowed no more money would be dished out and that through consolidations, banks would be ready to pursue profits.
He also said that Japanese banks would regain their place among the cream of world finance.
Two years later, however, outstanding nonperforming loans still total a daunting 18 trillion yen at Japan’s 16 major banks, according to Friday’s earnings reports.
Bank officials collectively said that deteriorating economic conditions of borrowers coupled with falling land prices keep necessitating them to set up more loan-loss reserves.
But the reserves hurt profits, at the same time that record-low interest rates limit profits from lending. Net business profits – from lending, bond dealings and other core banking operations – grew most for SMBC, which netted 833.2 billion yen.
With unrealized losses from shareholdings to appear in balance sheets for the current fiscal year, banks have said they want to reduce cross-held shares within two years so that the value of their shareholdings remains less than or equal to their capital base.
In fiscal 2000, SMBC sold 400 billion yen worth of cross-held shares, while MTFG sold 230 billion yen. UFJ eliminated 642.4 billion yen and Mizuho erased 900 billion yen worth.
“But we have to be careful,” cautioned Katsunori Konishi, Senior Executive Officer of UFJ. “Selling off these shares without the approval of the companies whose shares we own will damage trust.”
The problem, however, remains a time bomb. Unrealized gains shrank 63.8 percent to 560 billion yen at MTFG and 53.5 percent at Mizuho, to 321.5 billion yen.
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