Moody’s: Hurdles remain for Japanese banks

Japanese banks have overcome the stress scenario in 2008 but still has low operating profits relative to balance sheets.

"Major Japanese banks' net income for FY2009 has recovered from losses in FY2008 due to a return to normality of earnings recovery and reduced credit expenses. This recovery demonstrates their ability to manage down risk appetite while raising significant capital," says Moody's.

"However, despite improvements during FY2009, the fundamental problems facing Japanese banks remain unchanged, with operating profitability relative to their balance sheets remaining low. Moreover, recent capital enhancements are likely to further exacerbate this problem," adds Moody's.

The report notes that the recovery in major banks' net equity-related transactions from FY2008's significant losses was largely the result of the overall recovery of the Japanese equity market. The banks have also sold cross shareholding equities directly, or have used the equity purchasing facility established by the Bank of Japan and the Banks' Shareholdings Purchase Corporation, a government policy executing agency established under the special law.

In addition, despite some large corporate defaults such as that of Japan Airlines, credit expenses have significantly fallen during the period.

The proportion of credit expenses to total operating earnings among major banks has contracted to approximately 40 percent in FY2009 from approximately 70 percent in FY2008.

This decrease is mainly due to the extremely limited number of large corporate defaults, and to the continued steady decline in the number of Japanese corporate bankruptcies and SME defaults.