A Nightmare Year For Japan's Bankersby
Poor Mitsui Trust & Banking Co. It's one of Japan's most respected lenders and a cornerstone of the giant Mitsui industrial keiretsu. Yet the $169 billion lender has seen the price of its shares plunge 25% in Tokyo's latest stock market rout. At $6 apiece, Mitsui shares are now down an astonishing 80% since 1987. The problem? Collapsing property prices. As speculator after speculator has gone bust, Japan's big lenders are taking a pasting. "Real estate?" asks Robin Monro-Davies, managing director of the credit-rating agency IBCA Ltd. "It's spectacularly bad."
From Nagoya to New York and Stockholm to Sydney, many hard-pressed bankers are singing the same blue tune. Nowhere, however, is this apprehensive mood more apparent than in Japan. As BUSINESS WEEK's International Bank Scoreboard indicates, billions of dollars in bad property loans--the hangover of the go-go 1980s--are taking their toll on the country's mammoth lenders. "1991 was unquestionably the worst year for many banks since World War II," says Monro-Davies. And for many banks, 1992 won't be much better.
As their lending problems mount, Japanese banks are now trailing the world in about every measure but assets. Japan's largest banks are lenders to the Reichmanns' collapsed real estate empire, with its $12 billion in bank debt, while also struggling to overcome the crippling effects of massive domestic property losses and a crumbling stock market. As many as 10% of the loans at some Japanese banks may now be in trouble. Some analysts believe the industry's bad credits could total $230 billion--or even twice that.
One acute problem for banks is the spiral of failures among finance companies, which turned copious bank credit into an astonishing $800 billion in loans during the 1980s. Many of the loans went to buy real estate, which then was used as collateral for even more credit from banks or other finance groups.
To stave off big write-downs, many lenders are now scrambling to rescue a number of these finance firms. Mitsui Trust, for instance, was the main lender to Dai-Ichi Corp. and a related property developer, which together ran up $8 billion in loans. To keep them afloat, Mitsui and other banks this spring agreed to slash some debt payments in half and cancel others altogether. The deal will cost Mitsui an estimated $55 million this year alone.
Also debilitating has been the hit on the banks' unrealized stock market gains, which they're allowed to count as capital. With the Nikkei stock average down 60% since 1989, most of these "hidden reserves" have disappeared. If the Nikkei falls below 12,000, IBCA estimates, the world's biggest lender, Dai-Ichi Kangyo, as well as No. 2 Sumitomo and No. 3 Sakura, will have no hidden reserves left at all.
Even with the Nikkei around 16,000, many Japanese banks already fall short of new international capital standards taking effect in 1993. While a Bank of Japan official insists that "the problem is not an acute one," worried U.S. lenders have already pulled some $26 billion in deposits out of Japanese banks.
REAL TEST. All of these factors have made Japanese banks more vulnerable than they have been in years to competitive inroads worldwide. Last year, Japan's overseas bank assets actually plummeted 9%, to $1.9 trillion. If anything, the pullback is picking up speed in 1992. "There's a shortage of international banks these days," explains Union Bank of Switzerland Vice-President William J. Gasser. "We can pick and choose our business."
One measure of how long the Japanese banks can endure such stresses is their basic ability to generate earnings. BUSINESS WEEK's index of "real banking profitability" indicates just how far behind the Japanese actually are. Country-to-country differences in inflation, tax rates, and capital standards may make some banks' returns on equity--a key measure of earnings power--appear bigger than they really are. So the Scoreboard adjusts ROE for these factors to show how well the banks would stack up if they all operated under similar conditions. The Japanese lag badly behind other members of the top 50. And, according to supplemental data prepared by IBCA, they also trail many lenders in the fast-growing markets of southern Asia and Spain, as well as quite a few in the U.S.
Indeed, the U.S. is turning out to be one of the few areas where banking isn't a disaster. With the Federal Reserve keeping short-term interest rates so low that lenders can make money by doing nothing riskier than buying government debt, many banks are cleaning up. But American banks remain the exception. In Finland, Sweden, and Norway, for example, government bailouts are becoming common, as recession and collapsing property values eat away at one bank after another. For the Japanese and many others, sighs Deutsche Bank Managing Board Member Jurgen Krumnow, "there are a lot of nightmares." The nightmares that are yet to come could be even worse.
THE JAPANESE BANKS TRAIL IN PROFITABILITY... Real profitability index* BANCO POPULAR ESPANOL Spain 1.398 BANCO POPULAR ESPANOL Spain 1.398 BANC ONE U.S. 1.300 BANC ONE U.S. 1.300 BANCO SANTANDER Spain 1.254 BANCO SANTANDER Spain 1.254 BANCO BILBAO VIZCAYA Spain 1.224 BANCO BILBAO VIZCAYA Spain 1.224 BANKERS TRUST N.Y. U.S. 1.223 BANKERS TRUST N.Y. U.S. 1.223 NORWEST U.S. 1.218 NORWEST U.S. 1.218 BANK OF CHINA China 1.217 BANK OF CHINA China 1.217 J.P. MORGAN U.S. 1.216 J.P. MORGAN U.S. 1.216 SUNTRUST BANKS U.S. 1.215 SUNTRUST BANKS U.S. 1.215 BANK OF TAIWAN Taiwan 1.196 BANK OF TAIWAN Taiwan 1.196 * Based on return on equity, adjusted for differing capital ratios, inflation, and tax rates. Industry average=1.029 ...AND THE TOKYO CRASH IS ERODING THEIR CAPITAL Nikkei stock average level where capital is under 8% of assets** Nikkei=15,853 (June 24) SAKURA BANK 18,246 SAKURA BANK 18,246 TOKAI BANK 17,145 TOKAI BANK 17,145 NIPPON CREDIT BANK 17,403 NIPPON CREDIT BANK 17,403 BANK OF TOKYO 16,972 BANK OF TOKYO 16,972 HOKKAIDO TAKUSHOKU BANK 16,874 HOKKAIDO TAKUSHOKU BANK 16,874 FUJI BANK 16,542 FUJI BANK 16,542 MITSUBISHI BANK 15,781 MITSUBISHI BANK 15,781 INDUSTRIAL BANK OF JAPAN 15,693 INDUSTRIAL BANK OF JAPAN 15,693 DAI-ICHI KANGYO BANK 15,140 DAI-ICHI KANGYO BANK 15,140 DAIWA BANK 15,142 DAIWA BANK 15,142 ** New international capital standard scheduled for 1993 DATA: IBCA LTD.