In a move suggesting further deterioration in the cozy relations between banks and regulators, the Financial Services Agency slapped banks with a business improvement order Friday for failing to meet pledged targets in fiscal 2002.
The order targets five major banks and 10 regional banks whose capital includes public funds. They will be given until Aug. 29 to submit revised plans to turn their earnings around. If they fail to come within 30 percent of the new targets in the current business year, the FSA can demand changes in management.
This is the first time the FSA looks to be doing what it promised it would, which is to hold banks to business plans that analysts and even regulators have not taken seriously. To maintain the premise that banks would repay public funds on schedule, regulators have habitually winked at and excused them when they failed to meet planned earnings.
But the hardline tactics may be too little and too late for banks to make their repayment schedules, analysts say.
“Banks have to come up with realistic earnings plans, otherwise management could lose their jobs. But that could mean showing they are actually behind schedule for returning funds to the public, which means trouble for them and regulators,” said Shinichi Tamura, a bank analyst at UBS Warburg (Japan) Ltd. “They’ll be cutting things close.”
The five banking groups are Sumitomo Mitsui Financial Group Inc., UFJ Holdings Inc., Mizuho Financial Group Inc., Mitsui Trust Holdings Inc. and Sumitomo Trust & Banking Co.
The 10 regional banks are Momiji Holdings Inc., Ashikaga Bank, Hokuriku Bank, Kumamoto Family Bank, Hokkaido Bank, Chiba Kogyo Bank, Yachiyo Bank, Higashi-Nippon Bank, Fukuoka City Bank and Wakayama Bank.
If banks’ projected inadequate business profits and credit costs for the current year continue indefinitely, four of the six major banking groups that have yet to return public funds will be unable to meet the promised repayment dates.
For example, it would take Mizuho Financial Group Inc. until fiscal 2014 to accumulate the adequate reserves to repurchase its preferred stocks held by the government. This is in lieu of past injections totaling 1.95 trillion yen given to Mizuho’s component banks — Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan. That’s eight years behind an original pledge to return funds by fiscal 2006.
According to the same simulation, it would take Resona Holdings Inc. until 2028 to return close to 3 trillion yen in public funds. Resona was not included among the banks receiving an official reprimand Friday.
“Banks are off to a good start,” to dispose of nonperforming loans, Financial Services Minister Heizo Takenaka said.
The FSA on the same day announced that banks’ outstanding problem loans had fallen to 35.3 trillion yen at the end of March, down 7.9 trillion yen from the previous year.
But at the same time regulators are demanding that banks become profit-churning machines, banks are also under pressure to meet their “responsibilities to society.” They received public funds after pledging to continue lending to small companies, and these loans are in high risk of turning sour.
The improvement order signals that banks, especially regional ones, should hike the interest rates on loans, Tamura said. That’s bound to trigger a fierce outcry from politicians.