At Japan's Big Banks, Drive for Growth Sputters
By YUKA HAYASHI and JOANNA SLATER
May 23, 2007; Page C1
About a year ago, Japan's top three banks outlined ambitious plans to get back into growth mode. They had finally gotten rid of the bad-loan problems that had bogged them down for nearly a decade and were eager to boost their profitability so they could compete once again with rivals from the U.S. and Europe.
As the banks report earnings this week, it has become clear that the turnaround is taking longer than they hoped, frustrating their investors, including many U.S. mutual funds.
The three biggest banks by stock-market value -- Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. -- are counting on new areas such as mutual-fund sales, investment banking and wealth management for their growth. But those businesses have been slow to take off.
Meanwhile, the banks' mainstay lending businesses face tougher-than-expected competition. One of the fastest-growing businesses they beefed up in recent years, consumer finance, is posting big losses after the government imposed stricter regulations earlier this year.
On top of all that, Mitsubishi UFJ, or MUFG, and Sumitomo Mitsui, or SMFG, were punished by regulators for lax compliance practices.
The difficulties are reflected in the banks' earnings results for the fiscal year ended March 31.
Mizuho, the No. 2 bank, after MUFG, said its consolidated net profit fell 4.4% from a year earlier to 621 billion yen ($5.11 billion), after three years of rising profits.
On Monday, SMFG reported that its net tumbled 36% to 441.35 billion yen, due to a big loss in its consumer-finance unit and a write-down in its bond portfolio. The bank had swung back into the black a year ago after posting a big loss in the previous year to write off its bad loans.
MUFG's earnings are to be released today.
"These banks are desperately trying to improve their results and they compete like crazy," says Simon Davis, a portfolio manager at Putnam Investments whose fund holds stakes in Mizuho and MUFG. "You've had a nasty combination of lackluster growth, margins under pressure and reasonably poor results."
Up and Down
After rising strongly in 2005 in anticipation of the turnarounds, shares of Japanese banks were flat to slightly weaker last year and are down so far this year: MUFG has lost 7.5% of its value, while Mizuho is off 9.5%, and SMFG is down 8.2%.
The weak earnings were expected, in part because of the government clampdown on the consumer-finance sector. Regulators lowered the maximum lending rate in an effort to rein in aggressive lending practices. The move hurt the banks, which had invested in or formed ties with those lenders.
Many analysts predict a rebound next year as the banks put their consumer-lending problems behind them. Rising interest rates in Japan would also make lending more profitable.
Investors seem to agree -- SMFG's shares were actually up after its earnings report, in part because it more than doubled its dividend to 7,000 yen from 3,000 yen last year.
Mizuho expects 20% earnings growth for the current fiscal year and is talking about buying back stock and raising its dividend, says Taizo Ishida, who co-manages the $300 million Matthews Japan Fund, which counts Mizuho as a major holding. That's further evidence that the banks have put their balance sheet woes behind them.
But the current weakness means Japan's big banks still have a long way to go to seriously compete with such giant foreign rivals as Citigroup Inc. and HSBC Holdings PLC. While Japanese banks are less profitable and smaller than many of the global banking giants, they are also trading at roughly 1.8 times book value, making them cheaper than many major banks.
By many measures, including market capitalization and profitability, the Japanese banks lag way behind. MUFG's market cap, at $108 billion, ranks 11th among the world's biggest banks and is less than half that of Citigroup's $244 billion.
Bank executives vow to do better this fiscal year. "This is the year when we will solidify the shift from recovery to expansion," Masayuki Oku, SMFG's chief executive, said during a recent news conference.
Banks' Vulnerabilities
But other problems highlight how vulnerable Japanese banks have become because they have been so focused in the 1990s and early this decade on cleaning up their bad loans. Analysts say the banks have skimped on investing in compliance at a time when authorities look at operations more closely.
In December, the Securities and Exchange Commission ordered MUFG to improve its compliance practices after finding problems with procedures to block money laundering at its U.S. operations.
This forced MUFG to shelve its plan to acquire the status of a financial holding company, hurting its overseas-expansion plans. In Japan, MUFG and SMFG were punished by Japanese regulators for lax compliance at domestic branches, prompting the banks to invest heavily to bring their compliance capabilities up to date.
Some analysts say they are concerned that the banks' growth plans are too optimistic. For example, the banks plan to speed up overseas growth to boost profits. Signaling its intention, Mizuho last year listed its shares on the New York Stock Exchange and later acquired the status of financial holding company, an act aimed at boosting investment-banking business in the U.S.
Meanwhile, in Japan, the low profitability of the banks' core lending operations continues to be a problem. Margin from domestic lending has been razor-thin because of the nation's near-zero interest rates.
Near-Zero Rates
While the Bank of Japan started raising rates last year after a long hiatus, it has done so at a slow pace. SMFG said the margin from the parent bank's domestic lending business declined to 0.58% from 0.69% in the previous fiscal year, as the cost of raising funds by the bank increased more than the return it receives on its lending.
"Banks are having a hard time raising lending rates because of too much competition among themselves," says Ryoji Yoshizawa, banking analyst for Standard & Poor's in Tokyo.
Analysts say too many banks are going after similar sets of corporate borrowers, even as demand for loans remains generally weak. Rather than taking out loans, many companies have drawn from their ample cash reserves or raised money in the bond or stock markets.
Mr. Yoshizawa says the weak profitability, caused in large part by low-margin lending, raises a concern that banks could end up with bad-loan problems again if the economy slows and insolvencies increase.
Analysts also say fast growth overseas is unlikely in the near future, given that the banks' relatively weak financial standings and small stock-market values make large-scale acquisitions difficult.
"Banks outside of Japan thought the Japanese megabanks would go on a shopping spree again," says Hironari Nozaki, banking analyst for Nikko Citigroup Ltd. "At this point, that is very unlikely."
Mr. Nozaki says the capital bases of Japanese banks, though improved significantly recently, are still much weaker than those of top Western banks. It may be "five or 10 years until the Japanese banks can catch up," he says. |
