Japanese loans and creative derivatives...
May 22, 1999
Big Japanese Banks Report Big Annual Losses
By SHERYL WuDUNN
OKYO -- Underscoring the challenges they face in recovering their health, Japan's biggest banks reported steep fiscal-year losses Friday and most were records.
The poor performance largely reflected the banks' efforts to clean their books by writing off bad loans, but the losses, for the second straight year, were still larger than expected. The main reason is that the banks must follow stricter rules for evaluating bad loans and creating a deeper cushion of money in the event that good loans go bad.
The eight big banks that announced results Friday, in addition to Sanwa Bank, which reported Thursday, said they expected to make money in the present fiscal year, which ends next March 31. But banks had made similar predictions last year, only to reverse their forecasts because of stiffer regulatory rules and a persistently recessionary economy.
For the year ending March 31, 1999, only the Bank of Tokyo-Mitsubishi, the nation's biggest bank, reported a narrower net loss than the previous year, registering a negative 86.9 billion yen, or $700 million, six times smaller than the previous year.
Red ink flowed the greatest at Sumitomo Bank, which reported a consolidated net loss of 568.9 billion yen, or $4.6 billion. The bank spent one trillion yen, or $8.9 billion, to dispose of bad loans and build protection against loans that sour.
The other banks that reported Friday -- Dai-Ichi Kangyo Bank, Sakura Bank, Tokai Bank, Asahi Bank, Fuji Bank and Bank of Yokohama -- announced similar results.
Japan's banks have made significant strides to wipe unrecoverable loans off their books. And because there is a greater feeling that the banking system no longer faces a sudden crisis or a collapse, investors have been buying bank stocks, sending the benchmark Topix bank index up 30 percent so far this year. Even Friday, as earnings results trickled out, the bank index edged up.
But the challenges the banks face before they can restore themselves to health are enormous. Even now, many economists and analysts say that Japan's banking system, which is critical to any economic recovery, is not functioning properly.
The biggest challenge remains the recession. Even if the banks make no more new loans, their portfolio of bad loans would probably still expand, simply from financial troubles brought on by the weak economy.
The number of bankruptcies has fallen recently, particularly as the government has offered credit support to small businesses. But economists expect unemployment to rise in the coming months, which would put further strains on the economy.
Moreover, Japan's large and small companies alike have drastically cut their spending on plants and other projects so that demand for loans has weakened.
In any case, new lending has been dipping for months. Lending still fell in April, though at a smaller rate, even as banks received a windfall of cash from taxpayers as part of the government's effort to strengthen the banking system.
Though there are scattered reports of banks scouting around for lending opportunities, the banks seem mostly to have plunked large sums of their new money into government bonds. This has helped create a boom in the bond market, bringing down bond prices from their worrisome highs in February.
As part of the deal to receive public money, the banks agreed to restructure themselves and try to increase lending. But some central bank officials and analysts worry that instead of making new loans to companies, banks may simply sink their money into corporate bonds or commercial paper, which the banks consider less risky because these securities can be easily sold.
Some analysts are also still concerned about the true state of the banks' bad assets. A few borrowers, which the banks had classified as healthy, have suddenly gone belly up, leaving the banks with unexpected bad loans.
Moreover, after the Financial Supervisory Agency, Japan's banking regulator, inspected the portfolio of Long-Term Credit Bank, which was nationalized last fall, it discovered that the level of problem assets was nearly twice as bad as the bank had reported.
Regulators discovered that Long-Term Credit had disguised some bad loans, with the purported help of foreign financial institutions, by using complex derivatives to move the bad loans to an offshore entity -- usually affiliated with a foreign financial institution. Analysts worry about similar arrangements at other banks.
This week, the Nihon Keizai Shimbun, Japan's leading economic daily, reported that under the new standard for reporting, the total amount of bad loans rose 45 percent to 20 trillion yen, or $160 billion. That is an estimated eight times the amount of operating profits the banks earned this year, according to James Fiorillo, a banking analyst at ING Baring Securities (Japan) Ltd. |
