25-08-2012, 04:42 PM
Financial Situation and Management of Banking Sector
Financial Situation & Mgt of banking sector.docx (Size: 45.92 KB / Downloads: 19)
Introduction
In June of 2003, the structural reform package entitled “Basic Policies for Economic and Fiscal
Policy Management and Structural Reform 2003” was passed in the Cabinet. According to these
directives, the “Financial Revitalization Program” was launched and aimed to reduce the share of
bad loans in fiscal 2004 to half of the levels of fiscal 2002, and to have the bad loan problem
resolved by the same year. However, from fiscal 1992, banks have recorded credit costs totaling 88.2
trillion yen for bad loans, and it continues to be very difficult for banks to earn enough in profits
every year to dispose of the bad loans that exist now, as well as loans that may sour in the future.
In this study, we analyze the banking sector using recent data. First we use financial data up to
fiscal 2002 (at the end of March 2003) to analyze their fiscal health -- the profitability of the banks,
the bad loan situation, and their capital ratios. Then we examine such issues as the recapitalization of
the major banks, the business consolidation system in place for bank mergers, and the injection of
public funds into the banks.
Profit Structure of Banks
First let us examine the profit structure of the Banking Sector (Table 1). The “Lending Margin”
item has been hovering around 10 trillion yen since fiscal 1992, and in fiscal 2002, it fell by 400
billion yen over fiscal 2001. “Other Revenue” would be all profits/losses outside of Net Interest
Income, less the gains and losses from sales of securities, and gains and losses from sales of real
estate. This “Other Revenue” item had been fluctuating in the range between just over 2 trillion up to
about 3.5 trillion yen and had marked over 3 trillion yen for the years from fiscal 1995 to 1997
probably because as interest rates were declining, bond dealings were temporarily quite profitable.
This “Other Revenue” is rising again from fiscal 2000, and in fiscal 2002 this marked 3.6 trillion yen.
We believe that this is due to an increase in profits from bond dealing again. The total of these two
items, Lending Margin and Other Revenue, are the Gross Profits earned from banking activities.
These profits have been steady from about fiscal 1998, and in fiscal 2002, they rose by about 600
billion yen. Operating Expenses peaked at about 8 trillion yen in fiscal 1996, and have begun
declining, marking 7 trillion yen in fiscal 2002. Most of this reduction in expenses are from lower
human resources expenses and suggest that expenses are falling from mainly the restructuring efforts
of the banks. Another expense is the Loan Loss which is mainly composed of the loan loss reserves
and amortization of bad loans. By fiscal 1995, 97 and 98, they had risen to a massive 13.4 to 14
trillion yen. Loan Loss receded temporarily to between 6 and 7 trillion yen in fiscal years 1999 and
2000, but after the Special Inspections of the Financial Services Agency in fiscal 2001, banks
lowered their assessments of some of their borrowers, and the loan loss provisions once again
increased to 9.4 trillion yen. In Fiscal 2002, the amount of bad loan disposals fell to 7 trillion yen.
After Loan Loss Charges have been deducted from Gross Profit before Loan Loss , we are left with
the profit from their core business, their Net Operating Profit. This figure has been negative from
Japan Financial Report No.9, October 2003
Outstanding Amount of Bad Loans
We define "bad loans" here as, of the receivables such as loans held by banks etc., those with
which interest or principal are past due, or those loans that are feared to become past due. In Japan,
there are three definitions of bad loans: 1) Self Assessment Loans, 2) Risk Management Loans and
3) Loans based on the Financial Revitalization Act. Self Assessment Loans represent the most
important standard because banks estimate their loan-loss reserves and the amount of write-offs
based on this classification. Risk Management Loans and Loans based on the Financial
Revitalization Act are disclosed. They are required by the Bank Act or the Financial Revitalization
Act. However Self Assessment Loans are not disclosed on an individual basis.
Recapitalization of Major Banking Groups
The Financial Revival Program was launched in October 2002. Its objective is to construct a
strong financial system in order to resolve the bad loans problem of the major banks. It consists of
establishing a joint support system of the government and the Bank of Japan together to promote
banks’ taking loans off the balance sheet, make the asset assessment more stringent, and strengthen
the capital base of the banks. Table 6 shows the BIS ratios of The Major Banking Groups at March
2003. Here, Major Banking Groups are the Japanese biggest Holding Companies, with the asset of
more than 80 trillion yen. They are called the “four Mega Bank Groups”. At the end of March 2003,
Japan Financial Report No.9, October 2003