Japanese regional banks need to improve profitability

Sixteen Japanese regional banks posted core profits of US$3.55 billion in the first half of fiscal 2009. The figure is down 11 percent from the same period a year earlier, according to Standard & Poor's.

The banks' Tier 1 capital ratio stood at 10.3 percent, up from 10.2 percent as of 31 March 2009. The quality of capital remains good, with the ratio of preferred stocks and preferred securities to Tier 1 capital standing at 2 percent. In addition, the ratio of Adjusted Total Equity to risk assets stood at 10.5 percent, which is favorable on a global comparison. The banks' ratio of nonperforming loans net of loan loss reserves declined 0.4 percentage points from a year ago to 1.9 percent. However, it should be noted that the decrease in credit costs was partly attributable to the government's emergency economic package.

Although profits at many major banks have shown signs of improvement, such as an increase in operating profits before loan loss provisions, most regional banks continue to show a decrease in operating profits before loan loss provisions and core profits. As such, Standard & Poor's believes that a key challenge for rated regional banks is to improve their profitability. Net profits at the rated regional banks increased, mainly due to a decrease in credit costs and reduced losses from bond-related operations. However, the decrease in credit costs was largely attributable to an economic package introduced by the government, and not an improvement in business performance at the rated regional banks. Given that uncertainties remain over the global economy, it is not clear whether credit costs will continue to decline in the second half of fiscal 2009, ending 31 March 2010.

The decrease in core profits was mainly attributable to a decrease in both interest and fee income. Interest income, which is a main source of revenue, was US$7.4 billion, down 2 percent on a year-on-year basis, due to a reduction in loan-to-deposit margins and a decline in yields from securities investments. Fee income decreased 11 percent to US$1.2 billion due to the stagnant economy. In addition, a 1 percent increase in expenses to US$5.3 billion also contributed to lowering core operating profit.