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Thursday, Nov. 23, 2006
BUSINESS ACTIVITY CUTS BAD LOANS
Big banks see high profits in first half
Most major banks posted big profits in the April-September first half as brighter business activities led to a reduction in bad loans, allowing them to shift money from loan-loss reserves to the profit section.
Mitsubishi UFJ Financial Group Inc. reported Monday that it had 507.27 billion yen in net profit, while Mizuho Financial Group Inc. raked in a record 392.34 billion yen.
But Sumitomo Mitsui Financial Group Inc. said Wednesday its net profit dropped 37.9 percent in the six months to 243.7 billion yen.
SMFG President Teisuke Kitayama told reporters that a partial suspension of business at Sumitomo Mitsui Banking Corp. had affected its results.
In April, the Financial Services Agency ordered SMBC to suspend business related to financial derivatives for six months after it was caught forcing corporate borrowers to buy interest rate swaps to get loans.
All three reduced nonperforming loans and finished repaying public funds -- a sign the once-ailing banks are now on a steady recovery track.
However, analysts point out that much of their profits came from the rise in stock prices and loan-loss reserves, and not their core business income from interest rate margins.
"Even though the (Bank of Japan's) interest rate was raised in July, it will take a while before interest rates on various loans will actually be raised," said Akira Takai, chief analyst at Daiwa Research Institute.
Profit from MUFG's core banking business dropped to 548.93 billion yen in the six-month period, compared with a combined 699.39 billion yen a year ago. MUFG was created Oct. 1, 2005, through the merger of Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc.
Takai said the banks' financial structure will continue to improve in the medium-term, with another interest rate hike eyed as early as next month.
Now that the banks have finished paying off public funds, the focus will be on how they use their capital.
Takai stressed that the banks need to expand into direct financing, including investment, and lure individual and overseas customers with new services in addition to corporate customers.
But other economists point out that the major banks should instead still concentrate on reducing losses so they can start paying corporate taxes again.
Despite the brisk profit figures, none of the major banks is paying corporate taxes, which could add billions of much-needed yen to government coffers.
The tax law stipulates that businesses are exempt from corporate taxes if their losses exceed profits. The loss can be carried over for up to seven years, extended from the initial five years in 2004, to encourage disposal of nonperforming loans.
According to an estimate by the Japan Center for Economic Research, the nation's six major banking groups had at least 13 trillion yen in carried-over losses at the end of March.
Bank of Tokyo-Mitsubishi UFJ, which has not paid the corporate tax since 2001, posted 1 trillion yen in carried-over loss at the end of September, while the bank's forecast for pretax profit stood at some 875 billion yen for fiscal 2006.
But as losses gradually shrink, some banks are getting ready to start paying corporate taxes again.
Sumitomo Trust & Banking Co. became the first major bank to declare it no longer has carried-over losses and for the first time in 13 years will start paying corporate taxes based on profit it makes this fiscal year.
Other banks, however, will still need another three to seven years before they start paying again, analysts said.
Hitoshi Mochizuki, senior economist at the Japan Center for Economic Research, acknowledged that the tax exemption system encouraged companies to dispose of bad loans and recover their financial strength.
But Mochizuki also said banks, potential payers of large-scale corporate taxes, should not rely on the system for profit and try to start paying again as early as possible.
"Even if they finish repaying public funds, that is not the end," he said. "They should reduce the losses carried over by cutting costs and start paying corporate taxes."