Buoyed by a wide-ranging recovery and a massive one-time gain caused by reductions in loan-loss reserves, the nation’s top banking groups have reported record-breaking profits for the 2005 business year ended in March.

The combined net profits of the six major banking groups reached 3.12 trillion yen in 2005, or more than quadruple what they logged the year before.

The total also surpasses the record of about 2.2 trillion yen set by all banks in 1990 at the height of the asset-inflated bubble economy.

However, experts say the banks’ profits have soared merely because the economic recovery improved the credit ratings of many of their borrowers and therefore allowed them to reduce the amount of money they had been setting aside for loan-loss reserves in case the companies go under.

Therefore, even though banks appeared to be rolling in cash for the 2005 business year, they still have to come up with a long-term strategy for boosting their profitability, the experts say, adding banks are already coming under growing demand from depositors — who have had to put up with years of rock-bottom interest rates — for better services and higher interest.

Of the six banking groups, the three megabanks announced they will complete repaying this business year all of the public money they’ve received in government bailouts since the late ’90s.

But three major banks of the six banking groups have already projected declining profit for the current fiscal year after logging the one-time record highs.

Financial services minister Kaoru Yosano said rosy business results don’t necessarily mean the megabanks are ready to make a comeback.

“Interest on deposits remains at low levels, and (the banks) cannot yet pay corporate taxes,” Yosano told reporters after a Cabinet meeting Tuesday morning.

The banks’ reported earnings “are getting better, but if you ask us (the government), they are still only halfway to (being) self-sustaining,” he said.

Yoshiyuki Yamaguchi, a Rikkyo University professor and an expert on financial theory, said, “the prospects are not good” for the major banks. He said they must promoting lending, particularly to small and midsize firms, rather than pursuing short-term profits through sales commissions for products such as investment trusts.

“Major banks are making profits, but this doesn’t mean that they are meeting a stronger lending demand or making a profit on lending interest rates,” Yamaguchi said. “It simply shows that they cut back on (massive) loan-loss reserves they had put up by themselves.”

Koetsu Aizawa, a Saitama University professor who deals with financial system theory, said the banks also made the profits because they have profited from interest margins between lending rates and rock-bottom interests on deposits, while rises in stock prices helped improve their financial results.

Aizawa also urged the banks to undertake more profitable businesses related to corporate resuscitation and mergers and acquisitions, apart from conventional and housing loans.

Sumitomo Mitsui Financial Group Inc., one of the six major banking groups, booked a record-high net profit of 686.8 billion yen, while Resona Holdings Inc. reported a record net profit of 383.2 billion yen.

The figures followed an announcement Monday by Mitsubishi UFJ Financial Group Inc. that it earned a record 1.182 trillion yen in 2005, while Mizuho Financial Group Inc. booked an all-time high of 649.90 billion yen.

The other two megabanks also fared well. Mitsui Trust Holdings Inc. logged a record 119.68 billion yen and Sumitomo Trust & Banking Co. earned a record 100.07 billion yen.

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