The nation’s three major banking groups saw profits drop in 2006 because of losses at their consumer-finance affiliates, but analysts are growing optimistic that the banks have recovered enough to roll with the blows.

On Wednesday, Mitsubishi UFJ Financial Group said net profit rose 14.3 percent to 881 billion yen for the business year to March despite huge losses at affiliate Acom Co.

Sumitomo Mitsui Financial Group, which has consumer lender Promise Co. under its wing, raked in 441.4 billion yen in net profit in 2006.

Mizuho Financial Group, one of the top shareholders in consumer loan lender Orient Corp., posted a net profit of 621 billion yen.

“We incurred about 130 billion yen in losses from Acom and (credit card lender Mitsubishi UFJ) Nicos,” MUFG President Nobuo Kuroyanagi said. “But we managed to cover the losses with profits from other divisions.”

Kuroyanagi said the profits rose thanks to about 430 billion yen in unrealized profits from its stock investments, which offset losses at the lenders.

The three banks issued rosy forecasts for the year to March 2008, with SMFG predicting a net profit of 540 billion yen, up 22.4 percent, Mizuho 750 billion yen, and MUFG 800 billion yen.

Akira Takai, chief analyst at Daiwa Institute of Research, said despite big losses at the consumer lenders, banks are still posting profits in the hundreds of billions.

“Their profit levels are very high,” said Takai. “Because the banks’ nonperforming loans have decreased, losses (at consumer lenders) are not a big burden for them.”

According to the Financial Services Agency, the combined amount of nonperforming loans at banks nationwide as of the end of September 2006 came to 12.3 trillion yen, down from 36.8 trillion yen in September 2001.

Although the consumer lending business continues to be rough, losses from affiliated consumer lenders will not have as big an impact on the banks’ earnings as they did in the past, Takai said.

Consumer lenders have been hit hard by demands for refunds after the Supreme Court in January 2006 ruled against and capped Japan’s exorbitant “gray-zone” rates. The refunds forced the lenders to massively increase reserves to cover the losses.

The Diet enacted legislation in December to cap the lending rate at 20 percent, down from 29.2 percent, the maximum gray-zone rate, by late 2009.

However, Shinichi Ina, an analyst at Credit Suisse First Boston Securities, said it is too early for the banks to feel relieved.

“Huge losses may be a one-time thing,” said Ina. “But there’s still a risk of a credit crunch (by consumer lenders) that could spread to other sectors.”

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