Print

Email story

Comment

Email editor

Japanese banking sees an industry turnaround

When Mitsubishi Tokyo Financial Group Inc. takes over UFJ Holdings Inc. on Saturday, the new bank will emerge as the world's biggest. The bank will have assets of about $1.68-trillion, topping Citigroup Inc.'s $1.55-trillion.

TOKYO - Buying a scandal-tainted bank plagued by four straight years of red ink hardly seems like an auspicious way to cement a turnaround.

But when Mitsubishi Tokyo Financial Group Inc. takes over money-losing UFJ Holdings Inc. on Saturday, the new bank will not only emerge as the world's biggest - surpassing Citigroup in terms of assets - it also will symbolize the rebirth of a Japanese banking industry once buried in bad debt allowed by weak regulatory oversight.

Named Mitsubishi UFJ Financial Group Inc., the new giant will lead an industry that has undergone years of consolidation, largely reduced the burden of onerous bad loans and is now helping underpin the nation's economic resurgence.

"The banks are back," said Jesper Koll, chief economist at Merrill Lynch & Co. "A normal economy where you've got not just growth in employment and wages, but also growth in credit is likely to become more pronounced."

Just a few years ago, Japanese banks were saddled with huge debts that had piled up over a decadelong slowdown in the world's second largest economy after the stock and property price bubble burst in the early 1990s. Unlike their U.S. counterparts, who more systematically force banks to quickly write down the value of nonperforming loans, Japanese bank regulators allowed local institutions to carry bad debts on their books for many years.

The administration of Prime Minister Junichiro Koizumi, elected in 2001, has stepped up pressure on banks to clean up their balance sheets of bad loans, which peaked at $325.7-billion in March 2002.

The banks have accelerated their writeoffs of bad loans - leading to years of huge losses - and reduced bad debt to $166.5-billion by the end of March, according to the latest data from Japan's Financial Services Agency.

However, no one is really sure how much bad debt is out there, notes Yasushi Kimura, a banking analyst at the ratings agency Standard and Poor's. Some analysts have estimated that the 2002 peak figure was as much as four times the government's estimate.

In May, Bank Minister Tatsuya Ito declared that seven top Japanese banks had reached a "turning point" in reducing by half the proportion of their bad loans to lending - a government target for moving banks toward financial health.

It was a painful process. The industry as a whole - 129 domestic banks - booked four straight years of losses before reporting their first combined net profit in 2004, according to the Japanese Bankers Association.

Brett Hemsley, senior director for Japanese financial institutions at Fitch Ratings, predicted in a July report that the industry could report its highest net income this year,

Stock prices are also rebounding. This year, UFJ's share price climbed about 27 percent in the Tokyo Stock Exchange.

Mitsubishi Tokyo American depository receipt shares in the New York Stock Exchange gained 19.8 percent to close at $12.24 on Wednesday.

The banks also cut back on lending, sold problem loans to foreign banks and gobbled up weaker lenders - dramatically consolidating the industry.

The country's "Big Four" - Mizuho Financial Group, Mitsubishi Tokyo, Sumitomo Mitsui Financial Group and UFJ - didn't exist 15 years ago. All were formed in recent years through mergers with smaller banks.

But to achieve global competitiveness, Japanese banks need to boost their profitability. Interest margins, a measure of profitability, for Japan's big players are about 1 percent, about four or five times lower than that booked by U.S. rivals, Koll said. That's largely because of the Bank of Japan's policy of keeping interest rates near zero, but the central bank has hinted it may reverse the policy.

The problems that faced Osaka-based UFJ, the smallest of the "Big Four," provide a glimpse of what the industry went through.

It was the last of Japan's big banks to meet the government's target of halving the proportion of bad loans, only after posting a fourth straight annual loss in the year through March 2005.

The company's troubled clients included retailer Daiei, which is now undergoing a government bailout, while three former executives at its banking unit were arrested last December over allegations the bank lied to government authorities about its bad debts.

[Last modified September 30, 2005, 01:35:17]