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Review of Japanese Banks' Activities:Profits and Balance Sheets in Fiscal 2002*1

  1. *1This paper is an English translation of the original paper released in Japanese on August 18, 2003. The full text will also be published in the November 2003 issue of the Quarterly Bulletin.

August 29, 2003
Bank of Japan

Detailed time-series data on Japanese banks' financial statements is available in "Financial Statements of Japanese Banks (Fiscal 2002)."

2003/09/12 Corrections to Data in "Review of Japanese Banks' Activities:Profits and Balance Sheets in Fiscal 2002"

Some editorial revisions have been made to the English translation since it was initially released on August 29, 2003.
The original Japanese text, however, remains entirely unchanged.

Executive Summary

1. Major Developments in Profits and Balance Sheets of Japanese Banks in Fiscal 2002

Japanese banks1 recorded a large net loss of 4.9 trillion yen in fiscal 2002 (April 2002-March 2003), mainly due to large credit costs from disposal of nonperforming loans (NPLs) and a stock-related loss.

  1. (1) Operating profits from core business marked 5.2 trillion yen, a slight decline from the previous fiscal year of 5.6 trillion yen, which was due to a decrease in lending volume and a narrowing of the interest margin on securities.
  2. (2) Credit costs still exceeded operating profits from core business, although the amount declined to 6.6 trillion yen from 9.9 trillion yen in the previous fiscal year.
  3. (3) Net realized stock-related losses recorded 3.9 trillion yen due to a fall in stock prices.
  4. (4) The risk-based capital adequacy ratio fell despite a reduction in assets and capital-raising.
Major Developments in Profits and Balance Sheets of Japanese Banks in Fiscal 2002tril. yen, except where noted
FY 2000 2001 2002
Opreating profits Operating profits from core business2 4.8 5.6 5.2
Net realized bond-related gains/losses3 0.4 0.4 0.8
Operating profitstotal 4.8 4.7 4.7
Net realized stock-related gains/losses4 1.7 -2.4 -3.9
Credit costs5 -6.9 -9.9 -6.6
[Credit cost ratio,6 basis points7] [140] [204] [145]
Recurring profits/losses 0.6 -6.6 -4.8
Net income/loss -0.4 -5.0 -4.9
NPLs disclosed under the Financial
Reconstruction Law (FRL)
33.6 43.2 35.3
Consolidated risk-based capital adequacy ratio (%) 10.6 10.2 9.5
Consolidated risk assets 521 481 435
  • Notes:1.The number of "all banks" was 156 as of end-March 2003: 14 major banks including Shinsei Bank and Aozora Bank, 64 member banks of the Regional Banks Association of Japan (hereafter regional banks), and 53 member banks of the Second Association of Regional Banks (hereafter regional banks II), 13 trust banks which started business after 1993, 9 foreign trust banks, and 3 other banks. All figures without notes are on a nonconsolidated basis.
  • 2.Operating profits from core business = operating profits - net realized bond-related gains/losses + net transfers to allowance for possible loan losses (APLL) + loan write-offs in trust accounts.
  • 3.Net realized bond-related gains/losses = gains on sales of bonds + gains on redemption of bonds - losses on sales of bonds - losses on redemption of bonds - losses on devaluation of bonds.
  • 4.Net realized stock-related gains/losses = gains on sales of stocks and other securities - losses on sales of stocks and other securities - losses on devaluation of stocks and other securities.
  • 5.Credit costs = losses from NPL disposal, which includes net transfers to APLL, net transfers to special loan-loss provisions (SLP), loan write-offs, loan write-offs in trust accounts, and NPL disposal in the extraordinary profit/loss account.
  • 6.Credit cost ratio = credit costs/average amount outstanding of loans.
  • 7.One hundred basis points = 1 percent.

2. Japanese Banks' Efforts to Address Their Management Tasks in Fiscal 2002

Results in fiscal 2002 were unfavorable, but this partly reflected banks' efforts to address their management tasks such as NPL disposal and reduction of market risk involved in stockholdings. Progress in these areas is described below.

(1) Progress in NPL disposal

In fiscal 2002, major banks and some regional banks and regional banks II started to apply the discounted cash flow (DCF) method to loans to large borrowers classified as "special attention" in order to appropriately reflect the economic value of loans on allowance reserves. The outstanding balance of NPLs disclosed under the Financial Reconstruction Law (FRL) declined by 7.9 trillion yen to 35.3 trillion yen, because banks, especially major banks, accelerated the removal of loans to borrowers classified as "bankrupt," "effectively bankrupt," or "in danger of bankruptcy."

While the aggressive removal of NPLs may increase current credit costs, it also has the positive future effect of diminishing the risk of additional losses such as those caused by price declines in collateralized real estate. Therefore, major banks' aggressive removal of NPLs from their balance sheets in fiscal 2002 is expected to lead to a decline in their credit costs from fiscal 2003.

(2) Securing of sufficient returns on loans to cover credit risk

Banks sought to improve the interest margin on lending in fiscal 2002. Nonetheless, after deducting the realized credit cost ratio and general and administrative expense ratio, the margin continued to be negative, and is much lower than those for U.S. and European banks. Further efforts on credit risk management are needed to improve banks' frameworks for obtaining sufficient returns on loans to cover credit risk. For example, more effective use of financial engineering techniques and functions of credit-related markets would contribute to the appropriate evaluation of credit risk and active management of their loan portfolio.

(3) Reduction of stockholdings and the effective use of capital

Major banks reduced stockholdings by 9.7 trillion yen, to 14.8 trillion yen at end-March 2003, approximately 40 percent lower than a year earlier. This level was roughly equivalent to Tier I capital. Banks allocate their capital as a buffer against risks such as credit risk, stock price risk, and interest rate risk, based on their integrated risk management framework. Given that stocks are highly risky assets with large price volatility, it would be worthwhile for banks to make further efforts to reduce stockholdings from the viewpoint of using their limited capital more effectively for new profit-earning opportunities.