How many bad loans did banks write off in fiscal 2000? How many years will it take for banks to dispose of all their bad loans?
These are among the questions that arose when banks released their financial statements for fiscal 2000, which ended March 31 this year, focusing a large amount of attention on the issue.
As a result of disposing bad loans, some major banks, including the Mitsubishi Tokyo Financial Group, United Financial of Japan, Asahi Bank and Daiwa Bank, released income statements in the red.
“Major banks with relatively large financial resources tried to dispose of as many of their bad loans as possible. We should not judge them in terms of net losses for the single fiscal year,” said Hideyasu Ban, vice president of the stock research department at Morgan Stanley Dean Witter Japan.
The Mitsubishi Tokyo Financial Group, for example, posted consolidated gross profits of 1.29 trillion yen for fiscal 2000, a 130.8 billion yen increase over the previous year. However, the group reported consolidated net losses of 138.9 billion yen for fiscal 2000, after posting a consolidated net profit of 127.9 billion yen the previous year.
The net loss at Mitsubishi Tokyo is largely attributable to the 741.4 billion yen spent on the disposal of bad loans. The group still held 4.53 trillion yen in accumulated problem loans as of the end of March.
Though it is not common for banks with net losses to be considered strong, some major banks with relatively strong financial resources, including the Mitsubishi Tokyo Financial Group, have leeway to post net losses on income statements in a single fiscal year to dispose of problem loans, according to Ban.
There are several reasons banks dispose of large amount of bad loans even it causes a net loss for the year.
“People fear ‘uncountable’ bad loans and it is widely believed that the disposal of banks’ bad loans is necessary to revitalize Japan’s economy,” said Ban.
The figures for the total value of the nation’s bad loans vary due to the difficulty in assessing them. In a recent article in the Japanese edition of the Economist magazine, Japanese financial organizations’ total bad loans were estimated at over 33 trillion yen. The combined estimate for bad and special-attention loans was more than 150 trillion yen.
The government is calling on major banks to remove their problem loans from their balance sheets in two years, as well as to dispose of loans that may subsequently turn bad within three years.
However, many expect a new accounting rule which went into effect this fiscal year to slow the momentum of bad-loan disposal.
The new accounting rule forces banks to disclose unrealized losses from cross-held shares on their balance sheets. It is also believed that some banks will have to use their surplus funds to make up for the losses from cross-held shares.
In general, banks use surplus funds to pay dividends to stock holders. Banks that are unable to pay such dividends might be forced to accept injections of public funds, resulting in stronger government influence on bank management.
Therefore, banks with relatively limited surplus funds will concentrate more on covering losses from cross-held shares than on disposing of bad loans.
“The delay in the disposal of bad loans makes people concerned about the time span needed to write off the accumulated problem loans, but no one knows the exact amount of time necessary to solve the problem,” said Ban.
It is natural for banks to acquire new problem loans during the current economic slowdown. Because of this, the total amount of problem loans, especially those that hurt small and midsize banks, will not decrease drastically, according to Ban.
Besides, banks have yet to establish a clear way to assess problem loans. They currently follow standards set by the Financial Revitalization Law in disclosing their problem loans.
The law specifies four categories of loans: normal loans, special-attention loans, loans in danger of default, and bankrupt and de facto bankrupt loans.
If banks assess problem loans based on their own standards, it would be impossible to discuss the total amount of outstanding problem loans in the financial sector due to the lack of common ground.
Mitsubishi Tokyo Financial Group created a stir when it released its financial statement reflecting 4.53 trillion yen in outstanding problem loans for fiscal 2000, up 1.51 trillion yen from the previous year.
There is wide media speculation that the Mitsubishi Tokyo Financial Group’s revision of its problem loan figure proves past laxness in risk assessment. It also suggests other banks may still follow lax risk-assessment practices.
To avoid confusion, Morgan Stanley Dean Witter pays more attention to each bank’s loss reserves for normal assets and special-attention loan assets, rather than bad loans, said Ban.
Because of the possibility that normal and special-attention loan assets might become bad loans as a result of banks’ laxness in risk assessment and the prolonged economic slowdown, banks should increase loss reserves to prove their financial standing, he explained.
For example, loans to department store chain operator Sogo Co., which filed for court-mediated rehabilitation with the Tokyo District Court last July, were rated as special-attention assets by banks before the firm became insolvent.
“If they have higher loss-reserve ratios than those in the previous year, the banks would be able to recover trust from the public. Banks should make further efforts to wipe out concerns caused by the bad-loan problem,” said Ban.
Mitsubishi Tokyo Financial Group and United Financial of Japan, for example, reported larger loss-reserve ratios than those in the previous year, while other bank groups maintained similar levels compared to the previous year, said Ban.
According to Morgan Stanley Dean Witter, Mitsubishi Tokyo Financial Group’s loss-reserve ratio on normal and special-attention loan assets was 1.28 percent, up 0.27 percent from the previous year. United Financial of Japan recorded a ratio of 1.33 percent, up 0.24 percent from the previous year.
Banks, including Mitsubishi Tokyo Financial Group and United Financial of Japan, should further increase their loss reserves in order to eliminate all concern, Ban stressed.
“Even if they set aside more reserves for normal and special-attention loan assets, it will take at least two to three years for investors to wipe out serious concerns about the problem loans carried by major banks,” said Ban.
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