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The nation’s 13 largest banks are saying they expect to slide further into the red for the 2001 business year, booking 7.8 trillion yen in credit costs for risky loans — up 21 percent from November projections.

Their gloomy projections come as the Financial Services Agency prepared Friday evening to announce the results of its special audit launched in autumn. The audit was supposed to speed up banks’ bad-loan disposal and restore credibility to the FSA’s supervision of the banking system by targeting loans made to major banks’ most heavily indebted borrowers.

But economists, citing the problems raised by Japan’s debt-ridden condition, believe there is no immediate end in sight to banks’ growing bad-loan problems. Nor has the FSA succeeded in regaining its credibility as a watchdog, they said.

Almost in unison, bankers repeated the mantra that the peak of bad loans has passed, and that banks are now free to concentrate on making a profit.

“The worst of the bad loans, the ones by the largest borrowers, are accounted for,” said Minoru Machida, managing director of Mizuho Holdings, Inc. “With the economy like this, bad loans might rise a little next year, but we should be able to keep credit costs to within the range of operating profits.”

Mizuho Holdings projects its consolidated net loss to rise to 1.1 trillion yen from a 720 billion yen net loss announced in November. Credit costs from increasing bad loans rose to about 2.2 trillion yen — up 230 billion yen from projections — while appraisal costs from losses on its securities portfolio will hit 320 billion yen.

Of the 230 billion yen increase in bad loan disposal, Machida said about 100 billion yen is due to the FSA’s probe.

But analysts are not convinced by an audit by regulators or their assertions that banks are safe because they have a capital-to-debt ratio above 8 percent, the level required by international regulations, and over the 4 percent level required to operate in Japan.

“We had many clashes with auditors, but I am satisfied that we reached a conclusion that was satisfying to both sides,” said Jun Okuno, executive director of Mitsui Trust Holdings Inc.

The audits’ standards are lenient, said Katsuyuki Kumagai, general manager of the information department at private think tank Teikoku Databank, pointing to a record 173 cases of debt forgiveness in the 2001 calendar year.

“It’s a war of attrition without prospects,” he said. “Megabanks are not improving their earnings, they continue to dip into their accumulated capital, while price falls continue to cause more bankruptcies among smaller companies.”

Some 75 percent of the 2.2 trillion yen in bad loan disposal at Mizuho was to smaller borrowers.

According to private estimates, credit costs to major banks’ largest borrowers should stand at 30 trillion yen — about twice the FSA’s audit findings.

“I can’t think what financial regulators can do to regain market trust,” said Reiko Toritani, senior director at Fitch Ratings. Toritani said the market is unlikely to rest easy until banks are allowed to go bust or have their capital shored with an injection of public funds.

Banks’ credit costs have risen to roughly 150 percent of operating profits in the past, with the shortfall covered by unrealized gains in share prices, steadily depleting banks’ core capital.

“I believe the gap between the projected results and actual earnings results has helped to exacerbate distrust,” Machida said. “This is something we must reflect on more.”

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