3 Quarter Financial Year 2008 Results Show That Profits At Major Japanese Banks Remained Weak

The decline in profits at Japan's major banking groups over the three months ended 31 December, 2008, was greater than Standard & Poor's Ratings Services' expectations, according to a Japanese language report published by Standard & Poor's today. Japan's six

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The decline in profits at Japan’s major banking groups over the three months ended 31 December, 2008, was greater than Standard & Poor’s Ratings Services’ expectations, according to a Japanese-language report published by Standard & Poor’s today. Japan’s six major banking groups recorded a total accumulated net profit of 135 billion over the first three quarters of fiscal 2008 (ending 31 March 2009), down 90% from the previous year.

The decrease in net profit in the first three quarters was mainly attributed to an increase in credit costs, which was expected in line with an increasing trend in the second quarter, and an increase in losses from sales or depreciation of equity holdings, which was greater than our expectations, due to lower stock prices. The total amount of sales or depreciation of equity holdings fell sharply to a loss of 757.8 billion (first to third quarter on an accumulated basis), from a profit of 199.8 billion in the previous year. In addition, core operating profit (gross operating profit minus operating expenses minus profits and losses from sales and depreciation of bond holdings) also fell 6% to 2,529.3 billion due to lower fee income.

Japan’s six major banking groups are Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc, Sumitomo Mitsui Financial Group Inc., Resona Holdings Inc., Sumitomo Trust & Banking Co. Ltd., and Chuo Mitsui Trust Holdings Inc.

Standard & Poor’s real GDP growth rate forecast for fiscal 2009, which would significantly impact the banking groups’ future profitability, ranges from minus 1.7% to minus 2.2%. This indicates that the downturn in the economy may grow increasingly severe, given the rising number of bankruptcies and the intensifying credit crunch. Therefore, we believe the banking groups’ stand-alone credit quality (disregarding government support in emergency situations) will come under increasing downward pressure, although this is dependent on their future policies on investing in marketable securities and loans. Increasing credit costs and deteriorating capitalization due to further declines in share prices are worrying trends. On the other hand, liquidity at the major Japanese banking groups is strong compared to their overseas peers, supported by abundant core deposits. In addition, their ratio of gross nonperforming loans (NPLs) to total loans on a weighted average basis based on figures disclosed under the Financial Revitalization Law remains low at 1.57%, improving from 1.64% at the end of September 2008.

Standard & Poor’s takes the view that the counterparty ratings on the six major Japanese banking groups may have some additional room to reflect further extraordinary government support, considering the recent support provided by governments in other developed countries to major financial institutions, as well as the Japanese government’s continued supportive stance. The current ratings on the six major Japanese banking groups incorporate government support by one notch, given their importance to the financial system.

The outlooks on the long-term counterparty credit ratings on the major rated banking groups are stable, except for Resona Holdings. Even if the stand-alone credit assessment on the banking groups were to be lowered by one or two notches, Standard & Poor’s may affirm the ratings on the groups by further incorporating the government support factor. Conversely, the ratings or outlooks will come under downward pressure if the stand-alone credit quality of the banking groups significantly worsens, or if the government’s supportive position is weakened. However, the likelihood of such a downgrade is limited.

D.C.

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