All the major Japanese banks will return to net profit in 2010 financial year, thanks to the absence of the important losses mainly on stock investments, Fitch Ratings said in a report.
The annual results for the Japan's major banks to 2009 financial year were the weakest since 2003. The adverse effects from the surge in loan loss charges and impairment charges on stock investments on their already weak pre-provisioning operating profit led aggregate net losses of ¥1.6 trillion (Dh595 million) in 2009 fiscal year.
Fitch does not expect the losses on stock investments of the same magnitude as 2009 financial year during 2010 financial year after the banks' stock investment portfolios were re-valued downwards. However, some banks might post some sale losses on stock investments as some banks, including Mitsubishi UFJ Financial Group, Mizuho and STB, indicated their intention to reduce their extensive stock investments in the medium term.
But Fitch believes that the impact is expected to be limited, partly because major Japanese banks' stock holdings are for long-term business relationships and rapid disposal appear less likely.
As for loan loss charges, most of the major banks forecast that the accumulated, non-consolidated cost at subsidiary banks would decline.
However, Fitch expects that the assets quality of the major Japanese banks may weaken and lead to a further increase in loan loss charges in 2010 financial year, although the agency also believes that the costs are unlikely to jump to the level of the later 1990s to early 2000s, thanks to the major Japanese banks' improve credit risk management.
As the weak pre-provisioning operating profits are expected to continue 2010 financial year, Fitch does not exclude the possibility that the potential increase in loan loss charges may not be fully absorbed by the pre-provisioning operating profits at some banks again this fiscal year, despite their forecasting net income for 2010 financial year.
With positive but weak profitability in the best-case scenario, Fitch believes that the major Japanese banks' capitalisation remains under pressure. The agency expects that some of the major Japanese banks may need to further bolster their capitalisation if they incur another net losses or larger valuation losses on securities investments in 2010 financial year.
The major Japanese banks' large stock investments also remain a potential risk and pressure on their capitalisation. In addition, the risk-weighted assets may increase in 2010 financial year via worsening of their asset quality. The agency believes that there remain limited options for additional strengthening of capital in the market, after large equity issuances in the market have already been planned or completed.
The SMFG and Mizuho plan a maximum ¥834 billion and ¥600bn of new issuances of common stocks, respectively in 2010 financial year; Mizuho also intends to raise additional preferred securities. Repurchase and cancellation of subordinated debts (Tier Two capital) traded at discounts to the original issue prices in the market could help to increase Tier One capital, but the effect would be limited.
Thus, in Fitch's opinion, the capitalization is likely to remain the fundamental issue for most of the major Japanese banks, until profitability picks up along with the recovery in the macro economy. Even then, major Japanese banks' capitalisation might not strengthen rapidly, considering an increase in loan volume in case of a recovery of the economy and their relatively low-targeted capital ratios by international norms.
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