Looming resignation of PM Kan stirs anxiety over Japanese banks

This, as 10 largest regional banks and banking groups report a decline in both credit costs and interest paid on deposits, says Fitch.

Fitch Ratings says in a Special Report that Japanese regional banks' profitability will be more susceptible than ever to political developments within the country. This is in light of increasing uncertainty over the possibility of resignation from Prime Minister Naoto Kan.

Further, the ongoing political conflict within the ruling and opposition parties has added uncertainty to a fragile economic climate made worse by the earthquake in March. The agency sees downside risk to the regional banks' asset quality over the medium term, if the government fails to implement an effective economic policy to support the overall economy in a timely manner.

For the financial year ended March 2011 (FYE11), the 10 largest Japanese regional banks and banking groups turned in a modest performance overall, with a significant decline in both credit costs and interest paid on deposits. Nevertheless, this relief is unlikely to be sustained once disaster-related losses start to materialise in the form of rescheduling or forgiveness of loans.

For Fitch-rated regional banks - Shizuoka Bank, Ltd. and Suruga Bank Ltd. - their current financial profiles, such as their track record of profitability, a decent risk profile and capital position, underpin their respective Individual Ratings of 'B' and 'B/C'. The agency notes that their concentration in Shizuoka Prefecture leaves the banks exposed to sudden changes in the operating environment in Shizuoka and its surrounding area.

The report, "Japanese Large Regional Banks: Anxiety Continues in the Face of Uncertainty", is available on www.fitchratings.com.