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Overview of Japanese Banks: Observations from Financial Statements for Fiscal 2003*1

  • *1This is an English translation of Japanese original released on the same day.

July 23, 2004
Bank of Japan

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In fiscal 2003 (April 2003-March 2004), approximately 90 percent of Japanese banks1 posted positive net income, due to a decline in losses from the disposal of nonperforming loans (NPLs), i.e., credit costs, and to an improvement in stock-related gains/losses. The aggregate figures for both major banks and regional banks, however, continued to record net losses as a result of substantial disposals of NPLs at some specific banks.

The ratio of credit costs to total loans outstanding declined at many banks. This was due largely to a reduction in loan-loss provisions reflecting improvement in borrower firms' financial conditions and in the outlook for profits, against the background of economic recovery and banks' support for rehabilitation of firms. NPLs outstanding declined steadily, and the share of loans extended to borrowers with higher internal credit ratings has been increasing. The risks associated with loan portfolios declined as a whole.

With regard to the risk assessment of securities portfolios, risks associated with stockholdings diminished to a great extent, as progress was made by major banks in reducing their stockholdings to a level well below Tier I capital. Risks associated with bond holdings, on the other hand, increased for both major banks and regional banks, due to an increase in their bond holdings. However, the level of these risks is small compared to risks associated with stockholdings, and is within the range that can be absorbed by banks' profits and capital. In addition, even if long-term interest rates rise, losses stemming from the materialization of these risks can be offset to some extent as long as the rise is accompanied by a rise in stock prices and an increase in the value of loans.

Japanese banks' profitability remains weak. Income from fees and commissions from businesses such as over-the-counter sales of investment trusts and arrangement of syndicated loans has been increasing rapidly in recent years. However, the net return on loans, which has a significant effect on profits, continued to be negative for both major banks and regional banks, although it has been on an improving trend reflecting the decrease in the credit cost ratio.

Fiscal 2003 has witnessed decreases in both credit risks associated with loan portfolios and market risks associated with stockholdings. The risk factors that have restricted banks' business for such a protracted period are relaxing their hold. Nevertheless, it remains difficult to claim that the prospects for Japanese banks' profitability are entirely rosy. Japanese banks need to meet the varied requests of firms and individuals for financial services by strengthening their profitability through the efficient use of capital and the use of new financial engineering techniques as well as financial market instruments.

  1. Japanese banks in this paper consist of the 14 major banks and 114 regional banks that comprise the 64 member banks of the Regional Banks Association of Japan and the 50 member banks of the Second Association of Regional Banks, as of the end of March 2004. All figures are on a nonconsolidated basis, unless otherwise indicated.