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Developments in Profits and Balance Sheets of Japanese Banks in Fiscal 20011

August 14, 2002
Bank of Japan
Bank Examination and Surveillance Department

  1. English translation of the summary of the original report in Japanese which was released on the same day. The English version of the full report together with more detailed time-series data on Japanese banks' financial statements, which will be published in the November 2002 issue of the Bank of Japan Quarterly Bulletin. Detailed time-series data on Japanese banks' financial statements, a part of which was attached to this article as an annex in previous years, are from this issue released separately from the report with extended coverage of data under the title "Financial Statements of Japanese Banks" (available in MS-Excel file from the statistics section of our Internet Web site).

Click on ron0208b.pdf (278KB) to download the full text (released on October 9, 2002.)

In fiscal 2001 (April 2001-March 2002), Japanese banks2 recorded large net losses because they disposed of nonperforming loans (NPLs) and wrote off stocks in a substantial amount. As a result, banks' capital account decreased considerably, and unrealized capital gains on securities fell close to zero with the decline in stock prices. In contrast, consolidated risk-based capital adequacy ratios of internationally active banks remained in the range of 10 to 11 percent.

  1. 2See Note 1 to Table for the definition of Japanese banks.

Operating profits from core business 3 increased from the previous year and marked 5.5 trillion yen in fiscal 2001, which was close to the historical high of 5.6 trillion yen in fiscal 1995. This was because the increase in net interest income on international operations and the continued reduction in general and administrative expenses exceeded the slight decline in net interest income on domestic operations, which accounts for a large proportion of operating income.

  1. 3In this report, the Bank uses "operating profits from core business," which is roughly the sum of "profits/losses from interest-earning assets" and "profits/losses from fees and commissions" minus "general and administrative expenses," to show the fundamental profitability of banks.

Net interest income on domestic operations decreased slightly owing to the fall in the volume of lending and the narrowing of interest margins on securities. Net fees and commissions were generally level from the previous year as the increase in lending-related fees and commissions was offset by an increase in the cost of business streamlining and outsourcing. General and administrative expenses declined despite a slight increase in premises and equipment expenses, as there was a greater reduction in personnel expenses than the previous year.

The amount of NPL disposal surged to 9.7 trillion yen from 6.1 trillion yen in the previous year due to the increase in special loan-loss provisions made for loans to large borrowers at major banks. The amount exceeded operating profits from core business for the eighth consecutive year since fiscal 1994. The amount outstanding of NPLs reached 43.2 trillion yen, exceeding the level of the previous year, as major banks adopted stricter self-assessment criteria for their loans and broadened the definition of "loans requiring special attention."

Net stock-related losses recorded a historical high due to the decline in stock prices and banks' adoption of a more conservative impairment procedure for securities.

Unrealized capital gains on securities on a net basis were almost nil due to the fall in stock prices, and earned surplus decreased due to large net losses. In contrast, the consolidated risk-based capital adequacy ratios of internationally active banks remained in the range of 10 to 11 percent. This was because of the decrease in both the denominator (risk-adjusted assets) and the numerator (capital bases, which fell due to large net losses) in calculating the ratios.

In fiscal 2001, Japanese banks considerably reduced their risks in management by pressing forward with the disposal of NPLs and write-offs of stocks.

Nevertheless, banks still face challenges. They continue to hold a significant amount of NPLs and stocks. Many major banks had used up most of their financial buffer, that is, unrealized capital gains on domestic securities and on stocks held by their foreign subsidiaries, to sustain their financial strength. An increasing number of regional banks and regional banks II were unable to generate enough profits to pay out dividends.

Under the circumstances, Japanese banks have no option but to enhance their profitability in order to maintain financial strength, while disposing of newly emerging NPLs. Possible options for banks are expansion of interest margins on lending, and reduction of general and administrative expenses taking advantage of bank consolidations.

Table Selected Items from Japanese Banks' Financial Statements1

  • Selected Items from Japanese Banks' Financial Statements

Notes:

  1. The number of all Japanese banks or "All Banks" was 135 at end-March 2002: seven city banks; three long-term credit banks; five trust banks (excluding foreign-owned trust banks and trust banks that started business after October 1993); 64 member banks of the Regional Banks Association of Japan (hereafter regional banks); and 56 member banks of the Second Association of Regional Banks (hereafter regional banks II). Figures for Japanese banks in this article, however, cover data for 129 banks (13 city banks, long-term credit banks, and trust banks; 64 regional banks; and 52 regional banks II) on a nonconsolidated basis and exclude data for the following six banks: Shinsei Bank (formerly Long-Term Credit Bank of Japan), Aozora Bank (formerly Nippon Credit Bank), Tokyo Star Bank (formerly Tokyo Sowa Bank), Kansai Sawayaka Bank (formerly Kofuku Bank), Chubu Bank, and Ishikawa Bank. Unless otherwise noted, figures include profits/losses of the former Tokai Bank during April 1, 2001-January 14, 2002.
  2. Operating profits from core business = operating profits (profits/losses - expenses) - net bond-related gains/losses + APLL + loan write-offs in trust accounts.
  3. Net bond-related gains/losses = gains on bond-selling operations + gains from redemption of bonds - losses from bond-selling operations - losses from redemption of bonds - write-offs of bonds.
  4. Net stock-related gains/losses = gains on stock-selling operations - losses from stock-selling operations - stock write-offs.
  5. Loan-loss provisions and loan write-offs = loan write-offs (direct write-offs) + net transfers to special loan-loss provisions + net transfers to the APLL on special overseas loans.
  6. Figures released by the Financial Services Agency.
  7. Unrealized capital gains/losses on securities = market value - acquisition cost (amortized cost in case of debentures)