Six of Japan's biggest banks reported their largest annual losses ever Friday, a result of an effort to write off unrepaid loans and put the worst of a mountainous burden of bad debt behind them.
But even as the banks hack away at old problems, new ones are confronting them. Economic fragility at home and the financial crisis in Indonesia and the rest of Asia pose a double threat that could severely impair their ability to grant new loans for at least the near future."It's likely that this year will go down in history as the biggest ever," said Elizabeth Daniels, banking analyst at Morgan Stanley Dean Witter, referring to the amount of reserve money the banks are putting aside as a cushion for unrecoverable loans. "But it is also likely that the banks will have to continue to take reserves over the next few years."
"They don't have much more capital to eat through," she said.
Japanese banks have been struggling for years with what now amounts to at least $600 billion in bad debt, and several years' worth of loan write-offs have eroded their already weak capital bases. Many banks are writing off even larger chunks of bad debt in the fiscal year that ended March 31, 1998.
Bank of Tokyo-Mitsubishi, for instance, said it was setting aside reserves and writing off loans worth more than $10 billion and it reported a net loss of about $6.7 billion. Reporting financial results on Thursday, Sumitomo Bank said it had reserves and write-offs of about $8 billion and a net loss of $4.6 billion.
The threats of more corporate bankruptcies and persistent economic difficulties at home are also thwarting their prospects, though the banks forecasted profits for the current fiscal year. Profits from lending, bond trading and other core businesses collectively slid last year at four of the banks. Stock values at banks have plummeted and their funding costs are rising as foreign banks become more wary and charge more for lending to Japanese banks.
This year, a pivotal issue will be the severity of Asia's economic difficulties. Japanese banks have the largest exposure to Asia of any country - more than six times the exposure at American banks. Though Asian loans represent only 3 percent to 4 percent of total loans, in some cases, that exposure is greater than the bank's core capital base.
Japanese banks have $22 billion in loans to Indonesia, the largest exposure of any country. Bank of Tokyo-Mitsubishi said it had $3.3 billion outstanding in loans to Indonesia, while Sanwa Bank said it had $2.2 billion and Asahi Bank reported $362 million.