Wednesday, June 2, 1999
Japan's top 17 commercial banks have been trumpeting certain aspects of their annual reports for the year ended March 31, 1999, principally numbers showing that they removed more than ¥20.5 billion ($170.8 billion at ¥120=$1.00) worth of nonperforming assets from their books over the 12-month period. Bank executives assert that they now have wiped away the majority of their poorest quality assets and can turn their attention to other matters. The "end" of the bad-loan crisis, they argue, will allow them to reduce sharply the amount of money they must set aside to deal with the problem. Sakura Bank, Ltd., for example, reports that it expects bad-loan costs to fall to ¥100 billion ($833 million) in the current fiscal year, versus ten-times this amount it charged against profits in FY 1998. Likewise, Industrial Bank of Japan, Ltd. expects that disposing of nonperforming assets will take only ¥40 billion ($333 million) in FY 1999 versus ¥924 billion ($7.7 billion) the previous period.
Another bright spot is improved capital/asset ratios. All top banks reported improved ratios (broadly defined as Tier 1 plus Tier 2 capital to assets), thanks to efforts to pare down bad loans and infusions of public money into their capital bases (see JEI Report No. 11B, March 19, 1999). All banks easily clear the 8 percent floor for this figure set by the Ministry of Finance and the Bank for International Settlements.
Along with the good news there were some negative results to report. While their strenuous efforts to dispose of bad loans understandably led all banks to report sizable pretax losses, all but one of the 17 banks also reported that their net losses on core business operations also increased in FY 1998 over the previous year. Only Bank of Tokyo-Mitsubishi reported that net business profits had increased (by 63.1 percent) in FY 1998 and also the only institution reporting an after-tax profit for the period.
The "ugly" news was also there, if not always obvious. One undisguisable sore point is that the 17 banks still had nearly ¥20.8 trillion ($173.3 billion) in bad loans on their books as of March 31. Although calculated using tougher new standards suggested by the Financial Supervisory Agency (and thus not directly comparable to figures reported in previous years), this number clouds the credibility of bank executives' claims to have "completely" disposed of their nonperforming loan problems.
A more subtle "ugly" point is that banks relied heavily on an accounting dodge to shrink their after-tax net losses. Banks were able to use tax-deferred accounting for the first time in reported their FY 1998 results and, since all recorded pretax losses and therefore would be eligible for tax rebates, they claimed part of this future income stream in this year's accounting to narrow their after-tax losses. Fuji Bank, Ltd. led the way on this sleight-of-hand, claiming a positive tax effect of ¥732.6 billion ($6.1 billion). Even Nippon Trust Bank, Ltd., which has reported net losses for the past five years, claimed a tax accounting benefit of ¥20 billion ($166.7 million).
Yet another wart is the fact that nearly all banks refused to report the portion of their loan portfolios "that require attention" and fall into the ambiguous Class II of the FSA's four-class loan-quality scheme. Only Fuji Bank and its Yasuda Trust & Banking Co. broke out Class II loans. The other banks claimed that the definition is too vague to determine a hard-and-fast numbers for these kinds of loans, which include those extended to companies that have suffered after-tax losses for two consecutive years. Critics, however, scoff at this excuse, saying that it sends the public the message that the banks still are hiding the true extent of their bad-loan problems.
While the dramatic reductions in projected bad loan-disposal costs have generated optimism among bankers that they will be able to steer their bottom lines back into the black by the next time they report fiscal-year results, other observers are much more cautious. Without capital infusions from the government and the (one-time) income boost from tax-deferred accounting, 15 of the top banks would see their ratios of Tier 1 capital to assets fall below the 4 percent minimum required by MOF and BIS. Only Bank of Tokyo-Mitsubishi (4.46 percent) and Nippon Trust Bank (5.47 percent) would clear this hurdle. Unless the economy picks up, they argue, no amount of accounting tricks and gradual restructuring will be able to cover up the banks' problems.
EI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.