JAPAN'S BANKING OUTLOOK IS STABLE FOR THE NEAR TERM AS GOVERNMENT TAKES BELATED ACTION, SAYS MOODY'S
New York, April 21, 1999 -- The steady parade of credit-rating downgrades for Japanese banks is over, and most banks should maintain their current ratings at least for now, says Moody's Investors Service, in a report on the Japanese banking system.
"The government rescue of the Japanese banking system has finally begun in earnest, it appears coherent and well-conceived, and a full-blown banking crisis will be avoided," says Christopher Mahoney, Managing Director for sovereigns and banks at Moody's.
"We believe the road to financial health will be a very long one that will require additional government funds, besides the recent 7.45 trillion yen infusion," Mahoney adds, "and also will require a radical restructuring of the industry, which will take at least a decade."
Because of downgrades over the last several years, the average bank financial strength rating (BFSR) for 51 rated Japanese banks is D.
"If only major banks are considered, the average BFSR is E+, and it's a stunning fact that 14 of 17 major Japanese banks are rated E+ or E," Moody's banking analyst and Vice President Rieko McCarthy says. The average BFSR for other G-7 countries (Canada, France, Germany, Italy, UK, and US) is C. Banks' financial strength are rated A through E, with A the top credit ranking, and C considered good; E is very weak. (See below for list of major Japanese bank BFSR ratings.)
GOVERNMENT NATIONALIZING, RECAPITALIZING BANKS, ADDING TOUGHER REGULATIONS
Besides the March infusion of funds, government support for the banking system consists of nationalizing insolvent banks and protecting depositors. And Japan's main financial regulatory agency, the Financial Supervisory Agency (FSA), is starting to aggressively examine loan portfolios using strict examination standards and assigning more realistic classifications and requiring larger loan-loss provisions, the analysts say.
"Accounting is finally becoming more transparent and realistic as a result of the FSA's stricter approach to problem loan identification, classification, and loss provisions, and insolvent banks are increasingly seen as such and are thus candidates for resolution," says Mahoney.
The March infusion of 7.45 trillion yen to 15 Japanese banks "will temporarily lift serious regulatory capital pressure, although the banks' fundamental weakness in overall economic capital will not be resolved in the medium term, and while we see no dramatic upswing of their credit ratings, the possibility of further rating downgrades is limited by the government's protection of the financial system," says McCarthy.
Upgrades of Japanese banks' credit ratings are unlikely in the intermediate term because their ratings are ultimately tied to earnings. McCarthy adds, "the outlook for earnings is poor with heavy credit costs absorbing most of their earnings, delaying the accumulation of capital."
Fundamentally, "banks profits won't rebound until the Japanese economy starts growing again and interest rates rise," says Moody's banking analyst and Senior Vice President Ryan O'Connell.
BANKS' STEPS TO INCREASE PROFITS
Banks are taking a number of steps on their own to increase profits, including some banks cutting back foreign operations by 50%, others pruning their domestic network by 30% or more, and still others are planning to cut administrative and personnel costs by up to 20%.
Banks are also charging corporate customers higher interest rates on loans, although many corporate customers can't pay higher rates in the current economy. And while some banks are adding investment products and investment banking to their services, "we are skeptical that these new business lines will help raise profit margins," O'Connell adds.
The core problem of banks' asset quality "far exceeds official estimates, the amount of problem loans is higher than disclosed, and true losses are higher than FSA-required reserves," Mahoney says. "One reason the asset quality problem is so large and difficult to get the full dimensions of is because Japanese finance is in the midst of an epochal paradigm shift."
JAPANESE BANKS ARE LIKE PUBLIC UTILITIES
Historically, Japanese banks have acted like public utilities mobilizing domestic savings and lending to industry under government guidelines. Credit was directed on the basis of national industry strategy, ignoring such fundamental banking concepts "as liquidity, leverage, and cash flow. Banks were not expected or allowed to make individual decisions on the basis of creditworthiness," Mahoney says.
That paradigm has ended "and today bank portfolios are being inspected on the basis of classic credit principles, and bank executives are being held accountable for portfolio quality," adds Mahoney.
And the paradigm shift also has a significant impact on corporate borrowers, with their balance sheets being closely scrutinized. "It is no longer acceptable for corporations to have high leverage, weak profitability, poor liquidity and low interest coverage." says Mahoney, adding, "under this harsh new light, a whole new category of problem borrower is emerging: big names with weak balance sheets."
And because of the scale and murkiness of asset quality problems, the analysts say, the government's safety net for the banking system likely won't be withdrawn in 2001, as planned.
"We believe the authorities are using the deadline to force banks to accept government funds and to undertake painful restructuring in anticipation of the deadline," Mahoney says.
The report also includes a chronology of the Japanese banking crisis.
MAJOR JAPANESE BANKS AND THEIR MOODY'S FINANCIAL STRENGTH RATINGS
BANK NAME ... MOODY'S BFSR
Bank of Tokyo-Mitsubishi Ltd. ... D+
Sanwa Bank Ltd. ... D+
Sumitomo Bank Ltd. ... D
Dai-Ichi Kangyo Bank Ltd. ... E+
Fuji Bank Ltd. ... E+
Industrial Bank of Japan Ltd. ... E+
Sakura Bank Ltd. ... E+
Asahi Bank Ltd. ... E+
Tokai Bank Ltd. ... E+
Mitsubishi Trust & Banking ... E+
Sumitomo Trust & Banking ... E+
Toyo Trust & Banking ... E+
Nippon Trust & Banking ... E+
Chuo Trust & Banking ... E
Mitsui Trust & Banking ... E
Yasuda Trust & Banking ... E
Daiwa Bank Ltd. ... E
Vice President/Senior Analyst
Financial Institutions Group
Christopher T. Mahoney
Banking & Sovereigns
Vice President/Senior Credit Officer
Senior Vice President
Financial Institutions Group
NOTE TO JOURNALISTS ONLY: For a copy of this Moody's report, "Banking System Outlook: Japan," please contact Donna Gee in New York (212) 553-0376, David Frohriep in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Anita Poppi in Sydney (612) 9270 8111, Jean-Yves Caminade in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Lorraine Yee in Hong Kong (852) 2916 1112 or Christiana Aguiar in SÆo Paulo (5511) 3043-7186.
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