Fitch: Another Dull Year Expected for Major Japanese Banks

2010-06-07 07:44:03.754 GMT

FITCH: ANOTHER DULL YEAR EXPECTED FOR MAJOR JAPANESE BANKS
Link to Fitch Ratings' Report: Major Japanese Banks: Annual Review and Outlook -
Weak Recovery in FYE10; Similar Story Likely for FYE11
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=530746
Fitch Ratings-Tokyo/Hong Kong-07 June 2010: Fitch Ratings has commented in a
newly published special report that performance of major Japanese banking groups
will remain lacklustre in the fiscal year to end-March 2011 (FYE11). The agency
therefore does not expect any immediate change in their ratings, although the
situation may vary from bank to bank.
In FYE10, all major Japanese banks saw profitability recovered from the
particularly challenging year in FYE09, when most of them posted net losses.
However, extending the profit growth momentum into FYE11 will be unlikely, with
the banking groups forecasting profit levels to be similar to that of FYE10.
Fitch expects profitability from core operations to remain weak in FYE11, with a
small decline in loan loss charges to support a modest improvement in net
profits.
Fitch does not expect any large issuances of common stocks from major banks over
and above the potential issuance that Mizuho Financial Group (Mizuho) has
already registered. This is because the banks' low profitability will be unable
to withstand additional dividend payouts, and the market having already absorbed
repeated issuances before end-FYE10 may have a low appetite for additional
issuance. Therefore, the agency believes the accumulation of retained earnings
to be the primary way to strengthen the banks' core capitalisation. However,
given the likely weak profitability of the banks, Fitch does not anticipate a
material bolstering of core capitalisation, and these factors combine to limit
the possibility of an immediate upgrade to their ratings.
Fitch notes that a potential weakening of loan quality is a down-side risk for
these major banks. Although loan quality has remained sound on the surface,
Fitch remains concerned that a large portion of loans exempted from being
categorised as non-performing loans (NPLs) under government initiatives, may
eventually become NPLs, should the economy remains subdued and restructuring
efforts fail to significantly improve the borrowers' financial health. The
direct impact from sovereign credit concerns in parts of Europe are expected to
be limited, although it may affect the banks indirectly via weakening
performances of Japanese companies relying on exports to European markets and/or
a decline in stock prices.
As there are limited lending opportunities in both domestic and overseas
markets, the major banking groups are increasing their investment in the
Japanese government bonds (JGBs). However, since near-term prospects for
interest rate hikes in Japan are minimal, the risk related to JGB investments
will be limited. That said, interest rate risk may increase in the medium-term.
Fitch views the major banking groups' reduction in stock investment exposure
positively. However, as the banks appear to have sold stocks with lower
acquisition costs, the investment portfolios of these banks broke-even on
average when the Nikkei index breaches the 9,000 mark at end-FYE10, as compared
to 8,000 at end-FYE09.
The six major Japanese banking groups are Mizuho ('A'/Stable), Sumitomo Mitsui
Financial Group ('A'/Stable), Mitsubishi UFJ Financial Group (MUFG), Chuo Mitsui
Trust Group, Sumitomo Trust & Banking Company ('A'/Stable) and Resona Holdings.
Contacts: Chikako Horiuchi, Reiko Toritani, Tokyo, Tel: +81 3 3288 2772;
Jonathan Cornish, Hong Kong, +852 2263 9901.
Media Relations: Karen Cho, Hong Kong, Tel: +852 2263 9935, Email:
karen.cho@fitchratings.com; Chinatsu Ozaki, Tokyo, Tel: +813 3288 2679, Email:
chinatsu.ozaki@fitchratings.com.
Additional information is available at www.fitchratings.com.
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