THE BANKING INDUSTRY

Fiscal Year 1999 First Half Trends

    An Historical Restructuring Drama is Being Played Out Among the Major Banks

According to the Federation of Bankers Associations of Japan, the total ordinary profits of the 135 domestic banks for the half year ending September1999, excluding those that have [recently] failed, was 1 trillion 62 billion yen, a very large increase of 156.7% from the same period of the prior year.  The major factors behind this gain are a large decrease in specific provisions made for bad loans and an increase in net gains accounted for from equities, etc.

On the other hand, although loans to individuals showed growth, overall outstanding loans decreased 4.9% from the same period of the prior year, to 474 trillion 550.2 billion yen.  This was the fourth consecutive year of decrease.

The major banks have reached the conclusion that in order to strengthen their global competitiveness and improve profitability it is now necessary to adopt management strategies far beyond those that have characterized the past.  In this context Daiichi Kangyo Bank, Fuji Bank and The Industrial Bank of Japan have announced their plan to merge their operations to form the Mizuho Financial Group by the spring of 2002.  Similarly, Sumitomo Bank and Sakura Bank have also announced that they will merge in April 2002, a combination that transcends the limits of the traditional “zaibatsu” confines.  These mergers represent a truly historical restructuring scenario for the industry.

    Weeding Out and Restructuring Also Proceed for Regional Financial Institutions

In the regional financial institution sector, for the half-year ending September 1999, 26 of the 64 regional banks had positive ordinary profits, as did 51 of the 55 secondary regional banks.

However, since the grace period for taking the mandated emergency remedial measures has already expired, the financial authorities are determinedly pushing those regional financial institutions that are in trouble to resolve their problems and/or restructure.  Accordingly, it can be said that regional financial institutions are now in a major period of transformation.

In the seven-month period from April through October 1999, five banks -- Kokumin Bank, Kofuku Bank, Tokyo Sowa Bank, Namihaya Bank and Niigata Chuo Bank – were classified as failed.

At the same time, Osaka Bank and Kinki Bank merged in April 2000 and announced an alliance with Yamato Bank.  Of the four banks based in Yamagata Prefecture among the regional bank and secondary regional banks, Sonai Bank and Shokusan Bank announced their intention to merge in October 2000.  Apart from this, various survival strategies are being adopted by the regional banks, including the common use of basic systems by multiple banks.

Forecast and Outlook for the Fiscal Year 1999

    Intensifying Competition in the Retail Sector

Having gotten over the worst in terms of disposing of bad debts, 15 of the 17 major banks are expecting ordinary profits.  In a big turnaround from the approximately 6 trillion yen in combined ordinary losses recorded by those banks in fiscal 1998, they are now forecasting 1 trillion 400 billion yen in combined ordinary profits for fiscal 1999.

However, while those banks have managed to attain a stable, although reduced, level of ordinary earnings, the challenge of discovering new sources of profitability remains a major problem for them.  For the present, they are entirely focused on the retail sector and the main target is the relatively high profit “individual” banking customer.  But matters don't stop with the banking industry, from outside of the banking industry various companies are using their strongest products as weapons to begin to make inroads into the banking industry.  So it is expected that there will be an extreme intensification of competition.  Ito Yokado, utilizing its chain of 9,300 Seven Eleven Japan stores as its weapon, has announced that it will establish “a specialized settlement bank aimed at the individual retail customer.”  And Sony has announced that it will initiate operation of an internet-based “specialized individual banking internet bank.”

    Increasingly Active Assault on Small Loans for Small- to Mid-Sized Businesse

Some city banks and regional banks are starting to move aggressively into short-term no-collateral business loans. 

Heretofore in the banking industry, because of the difficulties associated with the small size of the loans and the setting of interest rates congruent with the risk involved, the attitude toward making loans to medium-, small- and very small- sized businesses has been very negative.  However, if various aspects can be resolved, including, dealing with the matter of so-called “shoko [business loan shark] loans” -- which have escalated to the level of a social problem, the implementation of low cost credit analysis and administrative procedures, the upgrading of risk management functions, etc., this type of product should be sufficiently feasible.  So, on that assumption,  the number of banks working to get the necessary infrastructure in place is increasing.

At the present time, although still on a trial basis, some city and regional banks have established specialized business loan development offices in quite rapid succession, and, as one element in their strategy to expand their retail marketing, it is quite likely that they will rapidly and aggressively increase their efforts in this direction.

    Trends and Prospects for the Regional Banks and Secondary Regional Banks

*Note 1: These companies are listed in the order of the sales for the year 1999.
*Note 2: The fiscal year 1999 shall mean the period from April 1999 to March 2000.
*Note 3: Symbols marked on sales figures shall represent as follows: ��: assumed; u: irregularly settled; and �¡: combined.
*Note 4: The mark * shall mean the number of a note.
*Note 5: The symbol --- in the figure cells shall mean that the figure is not available. The symbol --- in the growth rate cells shall mean that the rate for either the previous year or the current year is negative or unavailable, or the rates for both years are negative.
*Note 6:  Among the figures shown under the columns for “Fiscal 1999 Forecast”  are some actual results.

Fiscal Year 1999 First Half Trends

    Increased Profits for Regional Banks; First Profits in Three Years for Secondary Regional Banks

Overall ordinary profits for the 64 regional banks staged a large recovery in the half-year ended September 1999, due to the decrease in specific reserves made for bad loans.  As was the case for Joyo Bank and Gunma Bank, which, among others, returned to profitability, 62 of the 64 banks posted black ink at the ordinary profit level. The total of ordinary profits for all of the banks was 270.2 billion yen, up 220% from the same term in the previous year.

Secondary regional banks also registered ordinary profits for the interim period, for the first time in three years.  Like Hokuyo Bank, which took over the business of Hokkaido Takushoku Bank and achieved a 107% increase in ordinary profits over the same period in the previous year, all of the banks showed recovery.  The number of banks showing a loss fell to four, seventeen less than in the same period of the prior year.

    The Majority of Banks Register an Improvement in Capital Ratio

As a result of the strong implementation of emergency remedial measures and the pronouncement by the Financial Reconstruction Commission specifying a “capital ratio of 8% for healthy banks,” all of the banks have made improvement of their capital ratios an urgent objective.  21 regional banks and secondary regional banks issued convertible bonds or carried out capital increases during the first half of the fiscal year while four of the banks received injections of public funds.   As a result Ashikaga, Hokuriku, Mie, Kyoto, Towa, Hiroshima Sogo and Seikyo Banks all cleared the 8% capital ratio.  Of the 119 regional and secondary regional banks, 107 registered improvement compared to the period ending March 1999.  Shizuoka Bank with a ratio of 14.2% achieved the highest ratio among all of the banks.

Forecast and Outlook

Aiming to Provide Complete Service to the Individual Customer

Under increasingly severe pressure from both the city banks and the foreign banks, the regional and secondary regional banks have made the pursuit of the individual banking customer one of their main strategies.

Yokohama Bank, by increasing its banking locations through joint construction with McDonald's, is proceeding to build up its infrastructure catering to the individual banking customer.

Shizuoka Bank has developed a strategy of emphasizing risk-bearing type investments aimed at high net worth individuals, as well as seeking out maturing postal system deposits.  It is also working to diversify its investment product offerings with such items as investment funds and foreign currency deposits, and also to improve its marketing strength.

Acceleration in the Trend Towards Joint Use of Systems

Under pressure to deal with the rapid developments in IT (information technology), the regional banks have made both the upgrading and increased economy of their systems a pillar of their management strategies.  Already the trend toward the joint use of systems is being seen by such bank groups as:
(1) Fukuoka and Hiroshima Banks
(2) Michinoku, Saningodo and Higo Banks
(3) Gunma, Joyo, Hachijuni and Yamanashi Chuo Banks
(4) Yamagata, Hachijuni, Awa, Shinwa, Miyazaki and Ryukyu Banks
In addition, a twelve-bank group including Kyoto and Yokohama Banks is looking into the joint utilization of basic primary systems, which will serve to break down the barriers found in vendor and existing systems.

    Trends and Prospects for the Major Banks

*Note 1: These companies are listed in the order of the sales for the year 1999.
*Note 2: The fiscal year 1999 shall mean the period from April 1999 to March 2000.
*Note 3: Symbols marked on sales figures shall represent as follows: ��: assumed; u: irregularly settled; and �¡: combined.
*Note 4: The mark * shall mean the number of a note. *Note 5: The symbol --- in the figure cells shall mean that the figure is not available. The symbol --- in the growth rate cells shall mean that the rate for either the previous year or the current year is negative or unavailable, or the rates for both years are negative.
*Note 6:  Among the figures shown under the columns for “Fiscal 1999 Forecast”  are some actual results.

Fiscal Year 1999 First Half Trends

    Sixteen Major Banks Return to Profitability

During the first half of fiscal 1999 all of the 17 major banks registered decreased provisions for bad loans and, with the exception of Nihon Trust and Banking, all of the banks returned to profitability.  At all of the banks, which received an injection of public funds, the very highest priority has been put on a management renewal plan.  Progress in being made in expense reductions as well as in improving the interest earned spread on all earning assets.  However, in terms of loans to middle- and small-sized companies, while four banks -- Daiichi Kangyo Bank, Asahi Bank, Sumitomo Trust and Banking and Toyo Trust and Banking – have achieved their targets, overall loans in this sector are lagging.   Total loans outstanding for all of the major banks were 312 trillion yen, a 7.8% decrease from the same period in the prior year.

    Sixteen Banks Return to Profitability in their Consolidated Results

In terms of consolidated results, with the exception of Nihon Trust and Banking, the other 16 banks posted ordinary profits and interim term profits.  Sumitomo Bank showed an ordinary profit of 144.5 billion yen, and Bank of Tokyo-Mitsubishi 125.3 billion yen.  In total, all 17 banks recovered to the level of 910.8 billion yen in ordinary profits.  At the same time all of the banks aggressively worked to raise the level of comprehensive financial services offered, as well as to restructure their group companies.  Beginning a shift in emphasis from quantity to quality, the banks reorganized their network of overseas subsidiaries and pushed the consolidation of their domestic affiliates.  Compared to the end of March 1999, they reduced the total number of their consolidated group companies by 34 to 889 companies.

Forecast and Outlook

    The Continuing Threatening Overhang of Bad Debts

Of the 17 banks, 15 are forecasting ordinary profits, but the banks are still seriously threatened by the need to deal with large amounts of bad loans.  Because of the declining value of the collateral held and the increase in reservations for borrowers having financial difficulties, 16 of the banks have revised upwards their forecast for provisions needed for bad loans in the 1999 fiscal year.  The 17 banks have forecast that, in total, they will have to make provisions for approximately 2 trillion 850 billion yen in bad debts.  While this represents a reduction to about one fourth that of fiscal year 1988, when provisions for bad loans drove all of the banks into ordinary losses, it still remains at a level that the banks cannot fully cover out of their net operating earnings.  It is expected that all of the banks will have to carry out sales of stock that they hold in order to secure the funds needed to cover these provisions.

    Aiming to Increase Lending to Small- and Mid-Size Companies

At all of the banks, where loans to small- and mid-size companies are lagging, they have begun taking various concrete measures to overcome this, such as earmarking special funds, positioning specialized staff, and offering no-collateral “quick loans.”

The Industrial Bank of Japan has established a special allocation of 5 billion yen to lend to and invest in start-up “venture” companies.   As well as providing loans, even without collateral, to growth companies in such sectors as the internet and the environment based on their profitability and cash flow.  The bank will, at the same time, also look at equity investments, including the underwriting of new issues, so as to be flexible in meeting the funding needs of these companies.