Japan's banks under pressure as Nikkei hits fresh 20-year lows

Japan’s Nikkei 225 stock index fell to fresh 20-year lows today, sparking further concerns that the capital adequacy ratios of the country’s banks may come under acute pressure in the approach to the March fiscal year-end.

Japan’s major banks have around ¥24 trillion ($206 billion) in equity holdings, and the recent slump in the Nikkei – which briefly slid below the 8,000 mark for the first time since March 1983 on Monday before closing at 8,042.26 – has led to soaring unrealised losses on the balance sheets of the country’s banks.

This has come at a time when banks are under pressure from Japan’s regulator, the Financial Services Agency, to accelerate the disposal of non-performing loans (reported at ¥40.1 trillion as of September 2002), which has already depleted Tier One capital levels. With the equity market continuing to fall, there has been growing concern that capital ratios of the major banks could potentially fall below the 8% minimum recommended by the Bank for International Settlements (BIS).

“If the equity market falls further, there could be a situation under which [the major banks] find it very difficult to meet the BIS regulatory capital ratio,” said Mutsuo Suzuki, senior vice-president of the ratings group at Moody’s Investment Service in Tokyo.

In January, Mizuho Holdings forecast that its losses would reach ¥2 trillion at the end of March, following a sharp increase in loan-loss provisions over the year. As a result, it reported that its capital adequacy ratio would fall to around 9% from 10.42% in September 2002. Analysts reckon a further fall in the Nikkei, increasing the bank’s unrealised losses even further, could put Mizuho’s capital ratio under critical pressure.

The major banks have recently been scrambling to bolster capital reserves ahead of the fiscal year-end. Mizuho, for example, is in the process of raising ¥1 trillion through the issuance of preference shares, while Sumitomo Mitsui Banking Corporation (SMBC) announced in January that US investment bank Goldman Sachs will inject ¥150.3 billion of capital into the Japanese bank in exchange for convertible preference shares which, if converted, would give it a 7% stake in SMBC.

The Japanese government has stated it will consider converting the preference shares it holds as a result of the 1998 and 1999 bank capital injections into common stock – effectively a nationalisation – if there is a ‘serious deterioration’ in the banks’ financial performance, thought by some to mean a drop in capital ratios below 8%.