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Thursday, Nov. 22, 2007

Top bank groups' subprime hit limited

Mizuho top in losses but fallout not over yet

Staff writer

Profits at Japan's three major banking groups fell in the six months to September as they suffered losses linked to U.S. subprime mortgage loan woes, according to their business results, the last of which was announced Wednesday.

Although the losses may seem small compared with the hit U.S. financial institutions have incurred, the subprime loan woes are steadily eroding the profits of Japanese banks.

On Wednesday, Mitsubishi UFJ Financial Group said its group net profit plunged 49.4 percent to ¥256.7 billion between April and September as it wrote down some ¥24 billion in losses due to the widening subprime loan woes.

MUFG said it booked a realized loss of ¥4 billion and an unrealized loss of a further ¥20 billion due to the mortgage loan woes in the period.

But the banking group said its unrealized loss expanded further to ¥23 billion as of the end of October, suggesting losses may increase in the latter half of the year. It did not disclose its estimate for the full year to March.

MUFG expects to rake in ¥600 billion in net profit in the full business year to March, down from ¥880.9 billion at the end of this March.

Mizuho Financial Group booked the biggest subprime loan-related loss, of ¥70 billion, half of the total incurred by its subsidiary, Mizuho Securities Co.

Subprime loan losses for Sumitomo Mitsui Financial Group amounted to ¥32 billion in the same period, but the bank warned that total losses will balloon to ¥87 billion for the full business year to next March.

"There are points we have to reflect on in terms of risk management," Sumitomo Mitsui President Teisuke Kitayama said. "But at the same time, the losses were limited since we sold ¥350 billion worth of related securities in the first quarter."

Smaller banks didn't emerge unscathed either. Shinsei Bank Ltd. incurred losses of ¥18.9 billion and Aozora Bank Ltd. posted losses of ¥5.8 billion due to subprime loans.

The subprime loan upheaval is not limited to the balance sheets of financial institutions. It is also forcing some financial organizations to change their business plans.

Last week, Mizuho Securities, an affiliate of Mizuho banking group, said its merger with Shinko Securities Co. will be pushed back to May from the initially scheduled January date since losses caused by record defaults on U.S. subprime mortgages prompted a revision of merger conditions.

But banking analysts say they are optimistic about the impact the housing loan crisis will have on the banking industry since their investments in related securities were small.

"Compared with banks overseas, the exposure of Japanese banks (to housing loans with poor credit) was very small," said Akira Takai, a senior banking sector analyst at Daiwa Institute of Research. "So it's not that big of a problem."

U.S. Federal Reserve Chairman Ben Bernake has estimated that the losses of U.S. financial institutions will amount to $150 billion, or about ¥17 trillion, while the figure is expected to come to around ¥400 billion in Japan.

Hironari Nozaki, a senior bank analyst at Nikko Citigroup Ltd., agreed, saying that disclosure by the banks of their exposure to mortgage loan-related securities showed that the maximum losses Japanese banks may incur is not that large.

"At a glance, the figures may not look good," Nozaki said. "But it is a level Japanese banks can manage."

Nozaki added that the plunge in net profit was partly due to brisk business during the same period last year that led to a reduction of bad loans, allowing banks to shift loan-loss reserves to the profit sections of their profit and loss accounts.

Although the impact of subprime loans on the banks' half-year financial results will draw the public's attention, other factors have also pushed down their profits.

For example, Sumitomo Mitsui's profits are being eroded by the recent drop of stock prices of its credit card affiliate, OMC Card Inc., in which it purchased a 4.43 percent stake from Daiei in August.

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The Japan Times

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