- Sep. 30, 2020
- Sep. 30, 2020
- Sep. 24, 2020
August 10, 2001
Bank Examination and Surveillance Department
Bank of Japan
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In fiscal 2000, Japanese banks recorded small net losses for the year for the first time in two years. This was mainly because the amount of nonperforming loan (NPL) disposal continued to exceed operating profits from core business. Financial strength weakened as unrealized capital gains on securities decreased and as risk-based capital adequacy ratio declined, mainly reflecting the net losses recorded for the fiscal year.
Operating profits from core business, which represent the fundamental profitability of banks, recorded 4.7 trillion yen in fiscal 2000, down slightly from the 5.0 trillion yen in fiscal 1999. This was mainly because the fall in net interest income on domestic operations, which accounts for a large proportion of operating income, cancelled out the increase in net fees and commissions and cuts in general and administrative expenses.
Net interest income on domestic operations declined 4.7 percent from the previous fiscal year, owing to the decline in lending volume and in yields on securities. Net fees and commissions rose about 5 percent year on year. This was primarily due to fees and commissions from foreign exchange-related operations, sales of investment trusts, and coordination of syndicated loans. General and administrative expenses continued to decline year on year, down 1.1 percent from fiscal 1999, mainly reflecting cuts in personnel expenses.
NPL disposal reached 6.1 trillion yen and exceeded operating profits from core business for the seventh consecutive year since fiscal 1994, reflecting the prolonged weak business performance amid the worsening of the economy. This amount was approximately the same as in fiscal 1999, far above the forecast in autumn 2000.
Unrealized capital gains on securities decreased from a year earlier to 2.6 trillion yen at end-March 2001 from 10.8 trillion yen at end-March 2000. This was primarily due to the decrease in unrealized capital gains on stocks reflecting stock price falls. Risk-based capital adequacy ratio also declined year on year. This was a reflection of (a) the decrease in accumulated earned surplus given the net losses recorded in the fiscal year and (b) the increase in risk assets of internationally active banks owing to the depreciation of the yen.
Regarding the accounting standard, about 70 percent of Japanese banks, mainly regional banks and regional banks II, introduced mark-to-market accounting in fiscal 2000 ahead of the statutory schedule.
Banks' financial strength weakened, along with a slight decline after the substantial recovery in risk-based capital adequacy ratio from the position some years ago. This was because losses continued to be recorded while unrealized capital gains on stocks, which had compensated for losses, contracted. A surge in profits is unlikely in the current phase of adjustment and the prolonged low-interest rate environment. Under these circumstances, banks are required to (a) improve asset quality, (b) reduce the risk involved in holding stocks, and (c) establish a high-profit generating business model as soon as possible. Completion of the third task, especially, is strongly urged in order for banks to overcome their balance-sheet problem as mentioned in (a) and (b) above and be reborn as competitive financial institutions.
Despite massive disposal of NPLs, the amount stayed high due to the continued emergence of new ones. For banks to overcome the NPL problem and improve asset quality, they should pay attention to loan assets which may possibly turn into NPLs by accurately assessing business conditions and viability of firms and taking appropriate measures based on this assessment so that they can prevent asset deterioration and turn the assets into nonclassified ones, in addition to the disposal of NPLs.
Unrealized capital gains on stocks have cushioned the decline in profits, especially for major banks in the past several years, when losses continued. Unrealized capital gains, however, are falling owing chiefly to stock price falls. Moreover, banks are statutorily required to introduce mark-to-market accounting from fiscal 2001. In view of these, banks should promptly reduce their stock holdings and thereby mitigate the risk of stock price fluctuations that could destabilize their business management.
Operations yielding low profits, if maintained or expanded, are likely to cause deterioration of the balance sheet in the medium- to long-term. Raising profitability is another important task which is closely related to the balance-sheet problem. To improve profitability, banks should (a) cut general and administrative expenses in the short run and (b) secure appropriate interest margins on lending and expand net fees and commissions in the medium term.
Since the 1990s, lending operations have been recording losses on a basis that includes general and administrative expenses and the cost of NPL disposal. In this situation, banks are expected to secure interest margins that appropriately reflect the credit risk involved. To do so, banks should (a) refine the measurement of credit cost, (b) strengthen the function in regard to the assessment of firms' viability and the risks involved, and (c) promote project financing and other new forms of lending. Moreover, banks should strive for enhanced management efficiency considering the huge cost burden of disposing of NPLs, even given the progress in curbing general and administrative expenses, especially personnel expenses.
The task of establishing a high-profit generating business model mentioned above is especially important for major banks that aim to carry out a wide range of international operations as global financial institutions. In order to gain more credibility in markets at home and abroad and to strengthen their competitiveness, these banks are required to firmly and expeditiously establish measures to improve profitability.
Measures to raise banks' profitability include (a) improvement of interest margins, (b) cuts in general and administrative expenses, and (c) reduction of nonperforming assets. Effects of these measures, however, are limited if separately implemented, given the current harsh environment for banking business. It is thus necessary for banks to select and combine measures that suit their business model and management strategy.
The tasks mentioned above are ones that should be handled by banks themselves. These tasks are, however, closely related to the structure of Japan's economy. Therefore, a proper environment should be established at the same time, for example through implementation of various measures in a harmonious manner, to increase the effectiveness of banks' efforts.
For example, to completely solve the asset quality problem, corporate revitalization is indispensable.
To successfully reduce the risk involved in holding stocks, it is necessary to promote understanding by stock issuing firms and foster individual investors as final purchasers of stocks sold by banks.
Moreover, to gain an appropriate level of profits through financial intermediary operations in a market where the market mechanism and its discipline operate fully, a review of the presence of public financial institutions and their operations cannot be avoided.
These points are also mentioned in the "Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management" released by the government. Prompt implementation of these measures is eagerly awaited.