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Wednesday, May 21, 2008

Subprime crisis slammed banks in 2007

After a combined net profit drop of 34%, Big Four now believe they've weathered the worst of the storm

Staff writer

The U.S. subprime loan crisis and subsequent turbulence in stock markets worldwide pushed down profits at Japan's major banking groups in the business year that ended in March.

The combined losses of the four main banking groups from the subprime loan crisis reached ¥819 billion, up sharply from the ¥106 billion they had logged at the end of September.

But because the banks booked most of their losses related to risky housing and mortgage markets in business 2007, analysts say such losses will not continue to weigh them down this year.

On Tuesday, Mitsubishi UFJ Financial Group Inc. said it posted a group net profit of ¥636.6 billion in the 2007 business year, down 27.7 percent.

MUFG said its subprime losses for the year hit ¥81 billion. For the current year to March 2009, it is forecasting net profit of ¥640 billion, up 0.5 percent.

Mizuho Financial Group Inc. booked ¥645 billion in losses from the U.S. subprime loan crisis — the biggest hit among the four major banking groups.

Sumitomo Mitsui Financial Group Inc. said it incurred a ¥93 billion subprime loan-related loss.

Only Resona Holdings Inc., the fourth-biggest banking group, managed to avoid incurring any subprime losses, although it suffered a ¥43.8 billion loss as the value of its shareholdings plunged due to the impact of the subprime crisis.

As a result, the combined net profit of the four banking groups reached ¥1.7 trillion, down 34 percent from the year before.

"I think they disposed of most of the foreseeable losses," said Akiko Kudo, director of financial institutions at Fitch Ratings Ltd. in Tokyo.

Kudo said the U.S. subprime loan crisis hit the banks hard amid expectations they would finally start gaining greater profitability after finishing repaying public funds and recovering from the nonperforming loans of the late 1990s.

Banking groups should see better results in business 2008 as they are no longer burdened with subprime loan-related losses, but the economic slowdown at home and abroad will make it tough for them to rake in profits this business year, Kudo said.

"There are no positive elements" that would push up their profits, she said, adding that most Japanese banking groups gave conservative profit forecasts for business 2008.

While Mizuho said its group net profit is expected to jump 79.9 percent to ¥560 billion in the business year to March, Sumitomo Mitsui Financial Group forecasts its net profit to rise a mere 4 percent to ¥480 billion.

The subprime mortgage upheaval also dealt a blow to the banking groups in indirect ways that pushed down their profits, said Hironari Nozaki, a banking analyst at Nikko Citigroup Ltd.

"Their core banking profits were negatively affected because of the secondary impact from the credit market confusion," he said.

Nozaki pointed out that commission revenues declined in many banking groups because sales of financial products, including investment funds, slowed in the latter half of the business year.

Resona said its sales of investment funds in business 2007 was ¥2.28 trillion, down from ¥2.41 trillion the year before. Sumitomo Mitsui's commission fees in its banking unit fell 9.3 percent to ¥263 billion, while Mizuho's commission revenue was ¥352 billion, down ¥49.1 billion from the previous year.

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The Japan Times

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