Japan’s banks wake up to tough realities
By Michiyo Nakamoto
Published: November 21 2007 17:50 | Last updated: November 22 2007 02:13
Ten years ago, Japan’s banking industry began a descent into a dark decade that saw the disappearance of several banks and the injection of huge sums of taxpayers’ money to keep it afloat.
This November, with the bad debt nightmare behind it, the banking sector is a much happier place but its future is far from rosy.
The latest results from Japan’s leading banks highlight the problems that they still need to tackle in order to claim they are not just healthy but thriving.
The first problem is low profitability.
The return on assets of the US banking sector, at about 1.5 per cent, is about five times as high as that of Japan’s sector, notes the Bank of Japan in its Financial Stability Report, published in September.
Japanese banks have struggled in the face of weak loan demand.
Mitsubishi UFJ, Japan’s largest bank, highlighted the problem as it unveiled a drop in its corporate banking net operating profits due to a narrowing of lending spreads stemming from intensified competition.
Interest spreads, between loans and deposits, in Japan’s banking sector have been at about 2 per cent, compared with about 5-6 per cent in the US, notes the BoJ.
Japanese banks have been competing for a dwindling market as the high profitability of Japanese companies and their ability to tap the capital markets have reduced their dependence on traditional banking.
“Japan’s banking sector needs to map out strategies as to how to enhance its profitability from a long-term perspective,” the Bank of Japan wrote in its report. To this end, each bank needs to seek its own way to expand interest margins.
“Each bank needs to differentiate its financial services and diversify the product-quality mix of its services in response to customer needs,” it said.
The irony is that efforts to diversify their profit streams have backfired and the banks have been hit by their exposure to non-traditional businesses, such as consumer finance in Japan, and investments into new, risk products – particularly those related to US subprime mortgages.
Both MUFG and Sumitomo Mitsui Financial Group, which rushed into the consumer finance business, have seen their profits badly dented by their foray into that sector.
Just as the banks recovered enough from their non-performing loan problems to go on the offensive and build up their non-traditional businesses, the consumer finance sector was devastated by a court ruling that has unleashed a flood of claims from borrowers that they overpaid interest.
As a result, consumer finance companies have to take massive provisions against these claims and, together with a government decision to slash the maximum interest rate on consumer loans, the difficult market environment has led to huge restructuring costs.
Sumitomo Trust, the leading lender to Aiful, one of the largest consumer finance companies, in Japan, has increased provisions against its exposure to the sector by Y30bn ($277m). SMFG, meanwhile,has been expanding aggressively into the credit-card business, which it considers a promising source of future income.
But it has paid for its bet in the form of a Y111.5bn writedown on its stakes in consumer loan and credit card affiliates in the first half – including Promise – which led to a 30 per cent decline in net profits.
MUFG owns a similar-size stake in Acor, the consumer finance company, and, separately, its disappointing first-half results were largely due to the losses at Mitsubishi UFJ Nicos, its credit card arm.
Mizuho, meanwhile, had to write down the value of its preferred shares in Orient Corporation, a consumer finance group, by 99 per cent, or Y288bn.
It is also ironic that the banks should be battered by the US subprime problem just as they were making their way gingerly back into foreign markets.
Although the banks do not have direct exposure to US subprime mortgages, they were cautious investors in products linked to subprime mortgages, which have resulted in appraisal and real losses.
Mizuho, in particular, which has identified investment banking and global expansion as two key strategies, was affected significantly by the problem due to its apparently more enthusiastic embrace of advanced financial products.
The banking group unveiled a Y70bn subprime-related loss in the first half and cancelled the merger of its two broker affiliates as a result.
These latest hiccups are an obstacle to the Japanese banks’ ambitions to become more than just big fish in the large but shrinking pond that is their domestic market.
But with foreign banks, including Citigroup and HSBC, building up their presence in Japan and others set to follow, Japanese banks cannot afford to stand still. |
