Despite coughing up a record 7.57 trillion yen to cover credit costs, Japan’s major banks were unable to make a dent in the size of their bad loans, which shot up 47.4 percent from a year earlier to a record 27 trillion yen, according to fiscal 2001 earnings results released Friday.
The volume of loans to shaky or failed borrowers stands at 6.48 times the banks’ combined profits from core business operations.
In fiscal 2001, banks’ consolidated net profits slid deeper into the red by a combined 4.07 trillion yen, giving an indication of the long road ahead before Japan’s banks gain profitability.
In the year to March 31, more borrowers went under or became delinquent in their loan payments, and banks siphoned off more funds to deal with borrowers’ potential failures.
Meanwhile, falling share prices, bailouts of large borrowers, and the stricter risk assessment of borrowers, which in turn necessitated more loan-loss reserves to cover potential losses, towed banks deeper into the red.
“Operating profits grew, but credit costs continued to remain at high levels and share-price falls hurt us,” said Shigemitsu Miki, president of Mitsubishi Tokyo Financial Group, the nation’s third largest banking group. MTFG reported a net loss of 152.3 billion yen, sinking 22.3 percent deeper into the red from a year earlier.
MTFG was the only group to report a fall in outstanding loans, at 4.26 trillion yen, down 5.7 percent from the previous year.
Banks were forced to pay appraisal costs totaling 1.49 trillion yen on share issues that fell 50 percent or more from their book value. Fiscal 2001 saw the Nikkei benchmark index of 225 stocks hit postbubble lows.
But despite festering structural problems, banks again showed optimism for the coming year, repeating their pledges from previous years that “the worst was over.”
With the economy eyeing a cyclical recovery for the current fiscal year, the banks said they hope to keep credit costs within their operating profits — the sum of banks’ earnings on their core business. If realized, this would be an important step toward profitability.
“We are done setting aside reserves for the big borrowers,” said Yukio Yanase, president at Daiwa Bank Holdings Inc. The holding company unites Asahi Bank, Daiwa Bank and two regional banks, which are set to merge in April.
“The loans that are likely to sour this year are loans to medium and small-size companies,” he said. “Losses from these are more controllable than sudden losses from large companies.”
The Financial Services Agency, the nation’s financial watchdog, has instructed banks to dispose of 50 percent of loans to borrowers classified as “in danger of bankruptcy” or worse during the current year, and 80 percent in two years.
Bank executives said that goal will be reached.
Banks, however, have no choice. Years of stagnating profits and mounting bad loans have eaten away at their capital bases. Of the major banks, three have already been forced to delve into their capital reserves to cover losses arising from share price falls and bad loans.
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