Interim results at a number of
Japan’s leading banks paint a gloomy picture, as the country
tumbles towards a seemingly inevitable recession. A wave of the
country’s financial institutions are looking to raise capital amid
concerns about the global market turmoil extending to Japan,
reports Douglas Blakey.

The optimistic view prevalent in the first half of 2009 that
Japanese banks could escape the worst of the credit turmoil, based
largely on their relatively low exposure to the nuclear waste of US
sub-prime mortgages, is long gone.

Japan’s economy shrank in the third quarter of 2008, potentially
entering its first recession since 2001, resulting in the decision
of the central bank to trim the benchmark overnight rate to 0.3
percent from 0.5 percent on 31 October.

Japan - interim results FY 2009 for selected banking groups

Eight leading Japanese banks which have reported interim results
for the first half of fiscal 2009, covering the period from April
to September, suffered a consolidated 64.2 percent drop in profits,
as the global financial meltdown extended deep into the world’s
second-largest economy (see table).

The combined profits before tax of the eight banks totalled
$6.21 billion for the period, compared with $17.37 billion for the
same six months last year.

The eight banks – Mitsubishi UFJ Financial Group (MUFG), Mizuho,
Sumitomo Mitsui, Resona, Sumitomo Trust & Banking, Shinsei,
Aozora and Norinchukin – suffered in particular from an increase in
nonperforming loans and share losses due to the ongoing global
economic crisis.

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Searching for capital

Now, a number of Japanese banks have jumped on the
capital-raising bandwagon. Norinchukin Bank, the country’s
agricultural bank which suffered major credit derivative-based
losses, leading to a near 90 percent drop in first half profits, is
seeking in excess of ¥1 trillion ($10.49 billion), Asia’s biggest
capital-raising exercise of the crisis to date.

By contrast, capital raising plans announced by the Big Three –
MUFG, Sumitomo Mitsui and Mizuho – are relatively modest. All three
have also slashed full-year profit forecasts.

MUFG will seek to raise more than ¥900 billion through a share
issue and selling treasury shares, while Mizuho plans to raise up
to ¥300 billion to help shore up its capital. For its part,
Sumitomo Mitsui is looking for ¥400 billion by issuing preferred
shares.

Sumitomo Trust & Banking is also getting in on the act; a
bank spokesman said it would raise “tens of billions of yen” by the
end of the financial year.

Sumitomo Mitsui’s recent decision to cut back on overseas
lending and Shinkin’s withdrawal from overseas transactions has
only added to the gloom.

Lowest annual profit for six years

The country’s largest bank, MUFG, which suffered a 58 percent
fall in first-half profits before tax, cut its fiscal 2009 profit
forecast by two-thirds and expects to report its lowest annual
profit for six years. Mizuho and Sumitomo Mitsui, with first-half
profits before tax down by 86.4 percent and 45.6 percent
respectively, cut full-year profit forecasts by 53 percent and 63
percent.

In the first half of the year, lending losses and debt
provisioning by the Big Three were around double their original
projections. For the full year, Mizuho has said it now expects
lending related losses to rise by 150 percent year-on-year, to ¥235
billion.

Adding to the banks’ woes, their high-profile investments in
international foreign banks have not to date paid off.

By the far the largest was MUFG’s ¥900 billion stake in Morgan
Stanley, while Sumitomo Mitsui and Mizuho invested ¥100 billion and
¥130 billion respectively in Barclays and Merrill Lynch.

By the end of November, the value of Sumitomo’s 2 percent stake
in Barclays had fallen by around 50 percent.

Even more depressing

Outside the Big Three, results from Shinsei and Aozora were even
more depressing while the country’s fourth-largest bank, Resona,
said bad-loan costs increased almost fivefold to ¥133.4 billion in
the first half, from a year earlier. It stuck to its forecast for
full-year profit to fall 47 percent to ¥160 billion.

Aozora, part-owned by US private equity group Cerberus, has now
reported a net loss in three of the past four quarters and said it
will post a loss of around ¥27 billion for the full year.

Shinsei’s interim figures were skewed by a poor performance by
its institutional unit, wiping out advances made by its Individual
Group, which includes consumer finance and retail banking, where
profit jumped by almost 50 percent in the second quarter, its best
quarter in over two years.

Shinsei’s September acquisition of GE’s Japanese Consumer
Finance unit – to be renamed Shinsei Financial in April 2009 – is
expected to boost second half figures by around ¥30
billion.