All but two of the nation's 14 major banks fell into the red during the first six months of this business year, together setting aside a hefty 2.7 trillion yen in loan-loss reserves to cushion the potential impact from nonperforming loans.

Bad-loan writeoffs are expected to balloon to more than twice that amount and hit 6.3 trillion yen by the end of the business year as the economy continues to deteriorate.

Of the four major banking groups, Mizuho Financial Holdings, Inc., which comprises Dai-Ichi Kangyo Bank, Fuji Bank, Industrial Bank of Japan and UFJ Holdings, Inc., both plan to set aside 2 trillion yen apiece for bad-loan writeoffs for the full year. Sumitomo Mitsui Banking Corp. says it will set aside 1 trillion yen.

"No matter how strict our assessment was, our bad-loan writeoffs always exceed projections," Yoshiro Yamamoto, chairman of Mizuho said. "This is mostly due to sudden and unlooked-for failures in an extremely harsh economic climate."

Mizuho posted a group net loss of 264.6 billion yen after setting aside 1.038 trillion yen in bad-loan writeoffs for the interim period.

By dramatically beefing up their loan-loss reserves, Mizuho and other banks hope to account for most major credit risks during the current business year and concentrate on profitability in the next.

As an added incentive, financial regulators are conducting special inspections to make sure that banks' assessments are up to par as borrowers' credit ratings sink with slumping sales and consumption.

The bulk of the beefed-up loan-loss reserves is going toward dampening the blow from losses in real estate, construction and retailing, where the players and stakes are large.

But the worse may be yet to come, warned Shigemitsu Miki, president of the Mitsubishi Tokyo Financial Group.

"I anticipate that bad-loan writeoffs will peak toward the beginning of the next fiscal year, and I think that's the same for the entire industry," Miki said. "Newly arising problem loans are the crux of the problem."

MTFG posted a 96.8 billion yen group loss, after setting aside 313.9 billion yen in reserves. The group hopes to bring its outstanding bad loans to about 6 percent of its assets by fiscal 2004.

The 2.7 trillion yen in writeoffs came at the same time the 14 banks' group profits from core operations remained stalled at a total 2.2 trillion yen due to record-low interest rates, low credit demand and dipping share prices when they closed their books on Sept. 30. Only Sumitomo Mitsui Banking Corp. and Sumitomo Trust & Banking Co. reported first-half group profits, 34.2 billion yen and 6.3 billion yen, respectively.

Capital at banks has grown thin over the past decade as loan-loss charges continue to surpass operating profits. Now banks are hurrying to hedge against major losses and tapping into legally required last-resort funds.

Mizuho, SMBC, UFJ and Asahi Bank have announced they will transfer capital reserves and make dividend payments or to cover appraisal costs or loan-loss charges.

Others, like Asahi Bank, have applied for capital injections from friendly companies. But all remain adamant they are not seeking further injections of public money to deal with either their bad debts and loss-churning securities portfolios.

For the past decade, banks have been relying on sales of their massive shareholdings to cover falling earnings. Slumping market prices, however, have eliminated this option.

Indeed, now that banks are required to set aside appraisal costs on losses made on shareholdings, banks realize how vulnerable they have become to share price fluctuations.

In the six months to September, banks have been trying to unload at least some of their shareholdings -- a move that has been blamed in part for causing the slump. MTFG, for instance, is planning to unload 2.6 trillion yen of its stock holdings within the current business year.

But this is not going to be done very quickly.

"Before we sell off our shareholdings, we are getting the approval of the counterparties first," said UFJ President Hideo Ogasawara.

Nor is it clear whether banks will be able to return to profitability, although banks are stepping up their restructuring efforts, slashing jobs and closing branches to cut costs.

With so many banks vying to lend to a small number of blue-chip companies, interest rates have fallen below levels profitable to banks.

Bank officials are not scrambling for lucrative loans, but few have been able to make targets, Miki said.

"We are now emphasizing quality over quantity," said SMBC's president, Yoshifumi Nishikawa.