Japan’s banks will
continue to struggle over the next couple of years, faced with a
static domestic banking market, lending and consumer finance
restrictions and the possible competitive threat of the mighty
Japan Post Bank. This year’s annual results, while better than
those from 2006, painted a gloomy picture
.

Promise - consolidated net incomeJapan’s commercial banking groups and consumer
finance specialists have reported weak annual figures for fiscal
year 2007 (which closed on 31 March 2008), dragged down by tumbling
consumer finance fundamentals.

Mizuho reported a 50 percent drop in net income year-on-year, from
¥621 billion ($6 billion) to ¥311 billion, despite a 10 percent
rise in ordinary income and a 3.4 percent rise in total assets to
¥154 trillion. Mitsubishi UFJ, Japan’s largest banking group, was
hit by the collapse of the US subprime market – consolidated net
income was ¥636.6 billion, a decline of 27.7 percent on 2006. And
Sumitomo Trust & Banking reported a 21 percent fall in net
income to ¥82 billion despite a 28 percent rise in ordinary
income.

Shinsei Bank bucked the trend, reporting a 200 percent rise in net
income – it made a ¥61 billion loss in 2006, which it managed to
turn into a ¥60 billion profit in 2007.

Banks and consumer finance companies have cut forecasts for fiscal
2008 as they all adjust business models to cope with tough new
lending limits and a stubbornly static Japanese consumer banking
market. Acom, for instance, a division of Mitsubishi UFJ, the
country’s largest banking group, said revenues will drop 14 percent
this year, to ¥325 billion on top of the 10 percent fall it
suffered in 2007.

But despite weak figures for the year, results have generally been
higher than fiscal 2006, when an abrupt collapse in business
sentiment triggered by the aggressive changes to loan regulation
hit banking revenues substantially. Aiful, the second-largest
consumer finance player, reported a net income in fiscal 2007 of
¥27.4 billion, up from a loss of ¥411 billion in 2006.

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Promise, which bought rival lender Sanyo Shinpan in August last
year, posted net income of ¥42 billion in fiscal 2005, a staggering
loss of ¥378 billion in 2006 and a gain of ¥15.9 billion in fiscal
2007 (see bar chart). It is projecting net income for 2008
of ¥13 billion, a drop of 18 percent year-on-year. Promise is part
of the Sumitomo Mitsui Financial Group, Japan’s third-largest
financial services group by assets.

Tight government laws

Japan – market shareConsumer finance companies and banks in Japan have been hit
by tight government laws, passed at the end of 2006 but not set to
come into force until 2009, that cap the amount of interest that
can be charged on consumer loans: to 20 percent for loans of less
than ¥100,000; 18 percent for loans of less than ¥1 million; and 15
percent for loans of ¥1 million or more.

Foreign banking groups operating in Japan have been adversely
affected by the rules. Citi, which has just restructured its
Japanese operation following the $4.8 billion acquisition of broker
Nikko Cordial (see RBI 588), lost $126 million at its
Japanese consumer unit in 2007, dragging down overall Japan-sourced
income 75 percent to $97 million.

Moreover, in January this year (see RBI
585
), a senior Standard and Poor’s analyst warned the
country’s consumer lending market could “crash” if Japan Post Bank,
part of the privatised Japanese postal service, is granted
permission to offer consumer loans.

The unit currently offers basic retail banking services, but it
could soon be given permission by regulators to lend to consumers
and businesses. S&P analyst Ryoji Yoshizawa said if the company
did move into the competitive lending market the implications could
be serious. “[Japan Post Bank] is really huge. If it was to jump
into a Japanese lending market, the market will be skewed and may
crash.”

Japan Post Bank is the world’s largest bank by deposits, with
around ¥200 trillion on its balance sheet.

Acom – proportion of unsecured loans