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The nation’s six major banking groups have posted record consolidated net profits of 3.12 trillion yen for the business year ended March 31 — 4.3 times more than for the previous year and the highest in 17 years. This nearly doubles the previous record of 1.7 trillion yen logged by major banks in fiscal year 1988 during the asset-inflated bubble economy.

But their good performance is attributed largely to one-time gains. The banks need to make long-term efforts to improve their profitability so that they can return part of their profits to depositors who have been suffering from rock-bottom interest rates for years. Otherwise, depositors’ dissatisfaction with banks will only increase.

The latest performance is a sea change from the situation prevailing several years ago. To cope with a financial system crisis, the Bank of Japan, in March 2001, introduced an ultraloose monetary policy under which the central bank flooded the banking system with excess liquidity while keeping short-term interest rates at almost zero percent. Trying to tide over capital shortages, some major banks were experiencing such a hard time that they even borrowed money from companies to which they had extended loans.

The six banking groups now have lowered their average bad-loan ratio to 1.8 percent of total lendings. Within this business year, the three megabank groups of SMFG, Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. are expected to finish repaying all public bailout funds they received after the 1998-99 financial crisis. Resona Holdings Inc., whose outstanding public money borrowings amount to nearly 3 trillion yen, has strengthened to the extent that it should be able to completely repay its debt in three or four years.

But a close look at the good performances reveals a downside as well. Banks’ profits soared because the overall economic recovery improved the credit ratings of client firms and enabled the banks to book as gains the large amount of money they had set aside as loan-loss reserves. This is a one-time factor. In fact, the six banking groups’ net business profits from their main business operations totaled 3.9 trillion yen, 0.9 percent less than in the previous business year. Many banks did not pay corporate taxes because their profits were offset by losses carried forward in connection with the disposal of bad loans.

Financial Services Minister Kaoru Yosano aptly summarized the conditions of Japanese banks. Pointing to the extremely low interest on deposits and many banks’ failure to pay corporate taxes, Mr. Yosano said, “They are still only halfway to being self-sustaining.”

Banks need to pay attention to the massive earnings that depositors have lost as a result of continuing rock-bottom interest rates. According to one estimate, if the high interest rates that prevailed in 1991 had been maintained, depositors would have earned about 280 trillion yen. While the ultralow interest rates have deprived depositors, they have helped reduce the interest burden on corporate bank loans. This means, in effect, that a large amount of money has been transferred from depositors to companies and financial institutions. No wonder many individual depositors feel that banks have a moral responsibility to return part of their profits to them.

In addition to cutting back on massive loan-loss reserves, revenues from commissions on financial products such as investment trust funds and individual annuity insurance plans have contributed to banks’ profits. The commission business is easier because banks are free from risks inherent in the loan business.

Restructuring and decreasing the number of bank branches also have contributed to increased profits. The number of bank branches, which peaked at 17,000 in March 1994, has now dropped 20 percent to slightly less than 14,000. This is forcing inconvenience on customers. Some branches have only automatic teller machines and no workers. Long lines often form in front of ATMs. Additional fees on ATM usage have also been imposed. Better and more efficient services should be provided.

While Japanese banks have concentrated their efforts on restructuring and disposing of bad loans, major North American and European banks have built strongholds in the international financial market. To catch up with their rivals, Japanese banks must improve their profitability and diversify their operations through businesses related to corporate mergers and acquisition and through personal asset management. But it should not be forgotten that improvement in competitiveness should be translated into better services for customers and greater contributions toward strengthening local economies.

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