Profits and Balance-Sheet Developments of Japanese Banks in Fiscal 1996

• The full text is on the November 1997 issue of the Quarterly Bulletin.

November 1997
Bank of Japan
Research and Statistics Department

Overview

Operating profits¹ of Japanese banks² in fiscal 1996 amounted to 6.4 trillion yen, 5 percent lower than in the previous year. This decline reflects a decrease in the net bond-related profits and in the net interest income of city banks (Table 1). Excluding a temporary factor³ which contributed to an increase in profits on trust accounts, the decline in operating profits from the previous year was about 10 percent.

Loan write-offs and loan-loss provisions⁴ marked approximately 7.6 trillion yen (including trust accounts), which is the second highest level following fiscal 1995 when the jusen (housing loan companies) were liquidated. This suggests that most banks continued to give high priority to solving the problem of nonperforming loans.

Net stock-related profits⁵ were no more than about 1.0 trillion yen, approximately 2.9 trillion yen lower than the fiscal 1995 level, due to substantial stock write-downs resulting from the fall in stock prices. This reflects the fact that banks' balance sheets have become more exposed to volatility in stock prices because of a rise in the book values of stocks which resulted from recent cross transactions -- sets of purchases and sales transactions on the same stocks in order to acquire unrealized capital gain. As the loan write-offs and loan-loss provisions virtually matched the total of operating profits and stock-related profits, recurring profits and net income reached close to zero levels although this represented an improvement from the previous year.

Profits ¹

billions yen; figures in parentheses are percent changes from a year earlier, except as noted

Note:1. Because the recurring profits/losses and net income/losses turned negative, actual figures (in billions yen) for the previous year are shown in angular brackets.

1. "Operating profits" signifies earnings from core banking operations, arrived at by subtracting "general loan-loss provisions," "general and administrative expenses" and "expenses for debenture issuance" from the total of "net interest income" (e.g., interest received/paid for loans and discounts, deposits and securities), "net fee and commission income" (e.g., fees and commissions received/paid) and "net other operating income" (e.g., net profits related to bonds and foreign exchange).
2. "Japanese banks" or "banks" in this article refers to "All Banks," comprising the member banks of the Federation of Bankers Associations of Japan, which consists of city banks, long-term credit banks, seven trust banks (excluding foreign-owned trust banks and trust banks that started business after October 1993), the 64 member banks of the Regional Banks Association of Japan (hereafter referred to as regional banks), and the 65 member banks of the Second Association of Regional Banks (hereafter referred to as regional banks II). However, calculated figures exclude data for Hyogo Bank (the present Midori Bank), Taiheiyo Bank (the present Wakashio Bank), and Hanwa Bank.
3. Specifically, the temporary factor here refers to profits resulting from withdrawals from special reserve funds held by trust banks. The withdrawal profit resulted from a revision of a government ordinance that reduced the ratio of funds to set aside for the special reserve funds (from 3 percent of principal to 0.5 percent of principal). These are accumulated to provide for situations in which the value of a loan trust falls below the value of the principal. The trust banks applied part of the profit to write off nonperforming loans in trusts, and the remainder to be accounted as trust fees and be registered in the banking accounts as net fee and commission income.
4. This includes not only loan write-offs, but also transfers to special loan-loss accounts (provisions), losses from the sales of nonperforming loans to the Cooperative Credit Purchasing Company (CCPC), and renunciations of claims.
5. Stock-related profits/losses are calculated by subtracting from "gains on stock-selling operations" the sum of "losses from stock-selling operations" and "stock write-downs."