Standard & Poor’s Corp. said Wednesday that the slide in Japanese bank ratings is not irreversible, but that strong measures will be needed to regain credit strength because of the tough operating environment.
“The banks remain vulnerable to external factors, such as the declining economy and falling stock prices,” the U.S. credit rating agency warned in its “Bank Industry Risk Analysis” report.
“The financial sector’s weak fundamentals have failed to improve as shown by the recently announced financial results for fiscal 2000 ended March 2001,” S&P said.
Japan’s 14 major commercial banks said in May they are still swamped by 17.54 trillion yen in bad loans as defined under the government’s disclosure standards.
The bad-loan balance remained even after the banks booked in fiscal 2000 a combined 4.22 trillion yen in loan-loss charges, according to their financial statements. for the fiscal year. But S&P said it believes “an industrywide financial crisis is unlikely to occur as it did between 1997 and 1998.”
The agency cited two reasons for its assurances about the future of the Japanese banking system.
The average “Tier 1” capital-adequacy ratio of the major banks rose to 6.2 percent as of March 2001 from 4.8 percent as of March 1998, because “banks were forced to reduce (loan) assets rapidly to achieve their capital ratio requirements,” it said.
Tier 1 capital means capital, retained earnings and noncumulative preferred shares. A Tier 1 capital ratio is reached by dividing total Tier 1 capital by outstanding loans.
“Furthermore, a permanent public fund of 21 trillion yen is available to the banks, although access to the fund is limited to situations of financial crisis,” S&P said.
Under the revised Deposit Insurance Law, 15 trillion yen of the 21 trillion yen can be used to recapitalize banks or fully reimburse depositors at failed banks, if the government determines the banking system threatens to sink into crisis.
Among the “strong measures” S&P recommended are a bad-loan cut, a loan-loss cost cutback to an appropriate level, and a cut in vulnerability to stock price volatility risk by selling parts of share portfolios.
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