- Aug. 21, 2019
- Aug. 21, 2019
- Aug. 21, 2019
November 30, 2000
Bank of Japan
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Operating profits of Japanese banks1 in fiscal 1999 amounted to 4.6 trillion yen, up sharply from 3.8 trillion yen in fiscal 1998. Operating profits from core business2 --which show the basic profitability of banks-- maintained a relatively high level, recording 5.0 trillion yen, a moderate increase from 4.8 trillion yen in the previous fiscal year. On the other hand, the amount of nonperforming-loan disposal declined sharply to 6.1 trillion yen from the record high of 13.5 trillion yen in fiscal 1998. Nevertheless, it was still larger than operating profits from core business. The figures for recurring profits and net income in fiscal 1999, 2.4 trillion yen and 0.9 trillion yen respectively, were positive for the first time in three years, following two consecutive years of heavy losses. This was because banks posted large net stock-related gains to dispose of their nonperforming loans.
The average risk-based capital adequacy ratio of internationally active banks rose further from the level of end-March 1999, increasing to 11.79 percent at end-March 2000 (weighted average on a consolidated basis). This was mainly due to the improvement in net income to a positive figure and a decrease in risk-adjusted assets. In addition, as a result of the enhancement of the capital base of regional banks and regional banks II, the capital adequacy ratio of noninternationally active banks rose from the level of end-March 1999 to 9.69 percent (weighted average on a nonconsolidated basis).
Major features of the performance of Japanese banks and important issues they are faced with, drawn from an analysis of the profits and balance-sheet developments in fiscal 1999, are summarized below.
Operating profits from core business were at a relatively high level in fiscal 1999. This was due primarily to the following two factors. First, net interest income increased due to an expansion of overall interest margin. The expansion was attributable to the fact that the decline in the yield on interest-earning assets was relatively small because of many banks'efforts to improve their lending spreads while the average rate on banks'interest-bearing liabilities declined due to the introduction of the zero interest rate policy in February 1999. And second, general and administrative expenses continued to decline owing to banks'restructuring efforts, including reduction in the number of employees and branches.
From fiscal 2000, however, it will not always be easy for banks to increase net interest income by expanding interest margin, considering the following two factors. First, there is only limited room for further decline in the average rate on banks'interest-bearing liabilities. And second, banks, especially those that have strengthened their capital base through the injection of public funds, are placing greater emphasis on increasing lending to small and medium-sized firms to meet targets laid down in their plans for restoring sound management submitted to the Financial Reconstruction Commission (FRC). With respect to general and administrative expenses, expenses arising from mergers and integration and the burden of investment in information technology (IT) in order to remain competitive are likely to increase, while further cuts are expected due to progress in corporate restructuring.
Therefore, in order to steadily increase their profitability, banks should (1) further improve their efficiency through outsourcing of business and restructuring aimed at cutting labor and other costs, (2) secure lending spreads that properly reflect the credit risk involved, (3) promote lending to small and medium-sized firms and individuals, the long-term issue for the management of Japanese banks, (4) enhance the customer base by offering products and services that meet customers'needs promptly, and by diversifying the delivery channels of their services, and (5) expand new sources of profits (e.g., increases in profits from fees and commissions). It would become more crucial for each bank to engage in such strategic management based on identification of the business areas and types of customers in which each bank has a comparative advantage.
The amount of nonperforming-loan disposal in fiscal 1999 dropped below half of the largest-ever amount in fiscal 1998. Nevertheless, it remained at a high level exceeding operating profits from core business. This was due to a worsening of borrowers'financial condition and an increase in the unsecured portion of loans due to a fall in land prices.
The two keys to future developments in the disposal of nonperforming loans from fiscal 2000 onward are (1) how the borrowers' financial conditions will be in the future, especially those in the real estate, services, wholesaling and retailing, and construction sectors, which account for a large proportion of nonperforming loans, and (2) whether the amount of loans unsecured by collateral will continue to increase due to the fall in land prices.
It remains a major issue to remove nonperforming loans from banks'balance sheets (hereafter, final disposal of nonperforming loans), by collecting the secured portion of loans through the sale of collateral and liquidating nonperforming loans. Calculation of the cumulative total of final disposal from fiscal 1991 through fiscal 1999 based on certain assumptions shows that approximately 60 percent of the total book value (principal) of nonperforming loans have been removed from banks'balance sheets. However, it is hoped that banks will continue working actively on this issue.
The implementation of mark-to-market accounting and accounting for retirement benefits in fiscal 2000 is likely to have some impact on banks'financial condition and business operations.
With the introduction of mark-to-market accounting, the capital account will fluctuate in line with stock prices and interest rates (bond prices) since the bulk of banks'stocks that are cross-held for the purpose of long-term investment and bonds will be evaluated at fair value from fiscal 2001. This has already prompted banks to bring forward the disposal of unrealized losses ahead of their original schedules. In future, banks will be required to make investment in securities giving due consideration to the impact on their financial statements of fluctuations in the fair value of securities they hold.
With respect to accounting for retirement benefits, banks showed signs of starting to make up promptly the unrecognized differences arising from accounting changes (the so-called shortfall in reserves for retirement allowances). Some of them made up part of the shortfall during fiscal 1999 ahead of their original schedules, and a large number of banks planned to make it up during fiscal 2000 or within five years by establishing retirement benefit trusts. Nevertheless, attention should be paid to the following in making up the shortfall in reserves for retirement allowances: (1) the early making up of the shortfall will have some impact on banks'net profits/losses; and (2) banks which will reduce the shortfall in reserves for retirement allowances by offering their stockholdings as retirement benefit trusts will not be able to insulate themselves completely against the risk of stock price fluctuations.