No. 6 — February 11, 2000

 

Weekly Review

JAPANESE BANKS PAST WORST OF NONPERFORMING-LOAN PROBLEMS
--- by Jon Choy

The Financial Supervisory Agency's latest loan portfolio survey of domestic banks, which covered the April 1, 1999-September 30, 1999 period, revealed improvements almost across the board. As a group, nationwide banks, top regional banks and their smaller counterparts clearly rid their books of problem loans in FY 1999's first half. Another unambiguous development was apparent, however: banks reduced their overall loan commitments. This result almost certainly reflected the hard lessons that bank executives learned from the nonperforming-loan crisis that has wreaked havoc with traditional banking operations in recent years. Only time will tell whether the newfound caution translates into sound lending practices that help the economy restructure or produces overly conservative decisions that could retard a sustained recovery.

Observers took with many grains of salt declarations made in early 1999 by Japanese bank executives and government regulators that the banking industry's nonperforming-loan crisis was over. Despite some qualms about its recent leadership change, the FSA has convinced skeptics that it is forcing financial institutions to provide accurate and complete information about their lending and other business activities. At best, the agency's report on bank portfolios at the end of FY 1998 showed mixed signs of improvement (see JEI Report No. 36B, September 24, 1999).

The new FSA compilation of banks' self-assessments of their September 30, 1999 loan portfolios provides clearer proof that the industry is working its way back to financial health (see Table 1). Not only did the value of unrecoverable loans (Class IV) reported by every category of bank drop, but so did the totals for loans judged as unlikely to be repaid (Class III). Moreover, the 17 largest banks as well as first-tier regional banks listed smaller amounts for loans that require monitoring (Class II), although this figure rose slightly for second-tier regional banks.

Table 1: Lenders' Internal Assessments of Their Loan Portfolios,
March 31, 1999 and September 30, 1999

(in billions of yen)

March 31, 1999

Class I

Class II

Class III

Class IV

Total

All Banks

¥487,545

¥61,024

¥3,160

¥74

¥551,803

Top 17 Banks

316,814

39,209

2,296

71

358,391

First-Tier Regional Banks

127,669

15,442

582

3

143,695

Second-Tier Regional Banks

43,062

6,373

282

0

49,717

All Cooperative Institutions

126,174

15,608

700

2

142,483

Shinkin (Credit Associations)

70,144

10,209

358

1

80,711

Shinkumi (Credit Cooperatives)

13,723

2,278

234

1

16,237

Agricultural Institutions

24,911

1,583

67

0

26,561

All Financial Institutions

613,719

76,632

3,860

76

694,286

September 30, 1999

Class I

Class II

Class III

Class IV

Total

All Banks

¥470,001

¥59,469

¥2,633

¥36

¥532,139

Top 17 Banks

306,651

37,654

1,914

36

346,255

First-Tier Regional Banks

122,512

15,793

518

0

138,823

Second-Tier Regional Banks

40,838

6,022

201

0

47,061

All Cooperative Institutions

n.a.

n.a.

n.a.

n.a.

n.a.

Shinkin (Credit Associations)

n.a.

n.a.

n.a.

n.a.

n.a.

Shinkumi (Credit Cooperatives)

n.a.

n.a.

n.a.

n.a.

n.a.

Agricultural Institutions

n.a.

n.a.

n.a.

n.a.

n.a.

All Financial Institutions

n.a.

n.a.

n.a.

n.a.

n.a.

Notes: Class I: Loans with no or little risk of default
Class II: Loans with some risk of default that require monitoring
Class III: Loans that are unlikely to be repaid
Class IV: Loans that are unrecoverable
"All Cooperative Institutions" includes other lenders besides the three subcategories listed.
Cooperative institutions are not required by law to submit semiannual results.

Source: Financial Supervisory Agency ( http://www.fsa.go.jp/news/newse/ne_030b.html).

The financial watchdog also issued data that classifies bank loans according to a slightly different scheme of "risk management groups" (see Table 2). Compiled by FSA auditors, this analysis differed from the bank self-assessment report in the details but not in the overall picture. The figures for the value of total lending diverged, for example, but both showed decreases from end-of-FY-1998 levels. The FSA evaluation underscored a nearly universal improvement in loans to bankrupt borrowers (LBB), those at least six months past due (PDL), those three months or more overdue (3PDL) and restructured loans. The exception to this pattern was the PDL number for regional banks, which surged between March 31 and September 30. Analysts will be watching carefully to see how these financial institutions and regulators deal with this bulge as the end of FY 1999 approaches.

Table 2: Assets of Japan's Banks Classified by Risk Management Groups,
March 31, 1999 and September 30, 1999

(in billions of yen)

Nonperforming and Restructured Loans

Loan-Loss Reserves

Total
Assets

Of Which:
Loans

LBB

PDL

3PDL

Restructured
Loans

Total

Specific
Allow
ance

Total

Latent
Stock
Profits

March 31, 1999

Nationwide Commercial Banks

¥389,573

¥249,467

¥1,362

¥8,008

¥860

¥2,653

¥12,884

¥4,263

¥6,175

¥2,383

(1,330)

(8,714)

(1,009)

(1,970)

(13,023)

Long-Term Credit Banks

42,089

22,872

146

1,382

8

554

2,091

936

1,116

24

(148)

(1,307)

(9)

(555)

(2,019)

Trust Banks

90,015

47,846

774

3,532

114

856

5,275

1,614

1,967

297

(846)

(3,502)

(118)

(863)

(5,330)

Top 17 Banks Subtotal

521,677

320,185

2,282

12,922

982

4,063

20,250

6,813

9,258

2,704

(2,324)

(13,523)

(1,136)

(3,388)

(20,372)

First-Tier Regional Banks

200,303

138,584

1,498

1,824

439

3,007

6,769

3,254

4,117

2,355

Second-Tier Regional Banks

65,312

47,833

644

758

212

993

2,608

1,165

1,422

152

Regional Banks Subtotal

265,615

186,417

2,142

2,582

651

4,000

9,377

4,419

5,539

2,507

Total of All Banks

787,292

506,602

4,424

15,504

1,633

8,063

29,627

11,232

14,797

5,211

Total of All Financial Institutions

1,073,707

642,164

6,546

18,743

2,407

10,956

38,656

14,802

19,310

6,984

(6,932)

(20,157)

(2,639)

(9,922)

(39,651)

September 30, 1999

Nationwide Commercial Banks

¥382,069

¥242,523

¥990

¥7,986

¥652

¥2,745

¥12,374

¥3,297

¥5,146

¥5,218

(894)

(8,344)

(751)

(2,044)

(12,032)

Long-Term Credit Banks

39,615

22,422

153

1,407

7

439

2,006

1,027

1,208

173

(155)

(1,419)

(8)

(439)

(2,022)

Trust Banks

81,959

46,360

601

3,364

94

778

4,837

1,292

1,659

858

(644)

(3,407)

(104)

(784)

(4,939)

Top 17 Banks Subtotal

503,643

311,305

1,744

12,757

753

3,962

19,217

5,616

8,013

6,249

(1,693)

(13,170)

(863)

(3,267)

(18,993)

First-Tier Regional Banks

198,386

134,059

1,374

3,725

199

2,339

7,637

2,971

3,876

3,079

Second-Tier Regional Banks

63,036

44,236

556

1,143

115

1,047

2,861

1,015

1,251

342

Regional Banks Subtotal

261,422

178,295

1,930

4,868

314

3,386

10,498

3,986

5,127

3,421

Total of All Banks

765,065

489,600

3,674

17,625

1,067

7,348

29,715

9,602

13,140

9,670

Notes: Consolidated figures in parentheses.
LBB = Loans to borrowers in legal bankruptcy.
PDL = Past-due loans in arrears by six months or more on which interest is not collected and does not add to earnings but excluding LBB loans with interest payments suspended as part of a restructuring of a borrower by its lender.
3PDL = Past-due loans on which principal or interest is in arrears by three to six months from the date of default on the payment of interest or principal under the terms of the loan agreement, excluding LBB and PDL.
Restructured Loans = Loans on which the original interest rate or maturity terms have been eased.
Latent Stock Profits = Profit or loss that would have been realized if banks' stock investment portfolios had been liquidated on that date.
A total of all financial institutions is not presented for September 30, 1999 because cooperative institutions are not required by law to submit semiannual reports.

Source: Financial Supervisory Agency ( http://www.fsa.go.jp/news/newse/ne_030b.html).

 

Looking beyond the close of the fiscal year, experts point to three signs that signal that the nonperforming-loan situation is well in hand:

Table 3: All Banks' Reported Losses on the Disposal of Nonperforming Loans,
FY 1992-FY 1998 and First Half FY 1999

(in billions of yen)

Direct Write-Offs

Losses on Disposal of Bad Loans

Net Transfers to Specific Allowances for Loan Losses

Write-Offs of Loans

Losses on Sales to the CCPC

Total

FY 1992

¥1,640

¥945

¥204

¥219

¥424

FY 1993

3,872

1,146

235

1,855

2,090

FY 1994

5,232

1,402

706

2,103

2,809

FY 1995

13,369

7,087

1,721

2,526

5,980

[11,067]

[5,576]

[1,568]

[2,132]

[5,490]

FY 1996

7,763

3,447

973

1,133

4,316

[6,210]

[2,534]

[850]

[971]

[3,676]

FY 1997

13,258

8,403

851

1,043

3,993

[10,819]

[6,552]

[791]

[921]

[3,501]

FY 1998

13,631

8,118

2,377

359

4,709

[10,440]

[5,490]

[2,255]

[339]

[4,268]

First Half FY 1999

2,275

1,008

607

80

900

[1,587]

[476]

[585]

[77]

[812]

Cumulative Since FY 1992

Losses on Disposal of Bad Loans

Direct
Write-Offs

Nonperforming Loans

Outstanding Amount of Specific Allowances for Loan Losses

FY 1992

¥1,640

¥424

¥12,775

¥3,698

FY 1993

5,512

2,514

13,576

4,547

FY 1994

10,744

5,322

12,546

5,536

FY 1995

24,113

11,602

28,504

13,293

[21,811]

[10,812]

[21,868]

[10,345]

FY 1996

31,877

15,918

21,789

12,334

[28,021]

[14,488]

[16,441]

[9,388]

FY 1997

45,135

19,911

29,758

17,815

[38,840]

[17,988]

[21,978]

[13,601]

FY 1998

58,766

24,620

29,627

14,797

[49,280]

[22,256]

[20,250]

[9,258]

First Half FY 1999

61,041

25,520

29,715

13,140

[50,867]

[23,068]

[19,217]

[8,013]

Notes: 1. Losses on disposal of nonperforming loans refer to the total amount of net transfers to specific allowances for loan losses (formerly provisions in special accounts for loan-loss write-offs), write-offs of loans, losses on sales to the Cooperative Credit Purchasing Co., Ltd., disclaimer of loans and losses on support to other financial institutions.

2. Through FY 1994, disclosed nonperforming loans were composed only of loans to borrowers in legal bankruptcy (LBB) and loans past due six months or more (PDL). In both FY 1995 and FY 1996, disclosed bad loans were composed of LBB, PDL and restructured loans. Since FY 1997, nonperforming-loan figures also include loans three to six months past due.

3. Before FY 1994, the above data refer only to nationwide commercial banks, long-term credit banks and trust banks. Beginning in FY 1995, the figures cover all banks, while those in brackets refer to the same group of major banks.

4. Direct write-offs refer to the total amount of write-offs of loans, losses on sales of loans and losses on support to other financial institutions. However, before FY 1994, this figure was composed only of write-offs of loans and losses on sales of loans to the CCPC.

5. Hokkaido Takushoku Bank, Ltd., Tokuyo City Bank, Ltd., Kyoto Kyoei Bank, Ltd., Naniwa Bank, Ltd., Fukutoku Bank, Ltd. and Midori Bank, Ltd. are excluded from FY 1997 onward because these institutions failed. Long-Term Credit Bank of Japan, Ltd., Nippon Credit Bank, Ltd., Kokumin Kouhuku Bank, Ltd. and Tokyo Sowa Bank, Ltd. are excluded from FY 1998 because these institutions failed.

Source: Financial Supervisory Agency ( http://www.fsa.go.jp/newse/ne_030b.html).

Taken together, the three trends paint a much brighter picture of the financial condition of Japanese banks — a conclusion that extends beyond the bad-loan problem. As the red ink from nonperforming loans ebbs, profits, which already have shown signs of improvement (see JEI Report No. 46B, December 10, 1999), should get a boost. A more profitable banking industry could add to the positive momentum in Japan's equity markets since bank shares are important components of stock price indices. Analysts also hope that healthier banks will help to lift the economy by actively extending credit to businesses, especially small firms, for restructuring and investment. Pessimists warn, however, that loan officers — burned equally by their experiences in the go-go days of the late 1980s' "bubble economy" and by the problems associated with the "lost decade" of the 1990s — may not fulfill these expectations.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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