Japanese Juggernaut Slackens Its Pace

For two decades, the Japanese have picked nothing but plums in the global banking orchard.

But at home these days, the harvest is yielding more than a few pits.

New capital requirements, a weak real estate market, and a plunge in Japan's stock market have hammered earnings at local banks. As a result, the domestic scene is looking increasingly like that in the West: Many institutions are keen to shed assets, trim costs, and lop workers from the payroll.

So at least in the near term, the big picture shapes up like this: Expect the Japanese to remain heavyweights in the global ring. But expect, too, that a full plate of problems at home may constrain their vaunted appetite for risky, international ventures with razor-thin profit margins.

"The outlook for Japanese commercial banking is bleak with the industry showing no sign" of future profitability, said Robin Munro-Davies, managing director of IBCA Ltd., a London-based rating agency.

Rate of Growth Slows

According to figures compiled by American Banker, assets at Japan's largest bank, Dai-Ichi Kangyo Bank, edged up 6.1% to $428.17 billion in the fiscal year. Sumitomo Bank, Japan's No. 2, posted an 11.1% gain to $409.16 billion in assets.

The increases were considerably below those of 20% to 30% chalked up by many, large European banks in the 1990 calendar year. Moreover, since the yen appreciated some 13% against dollar during the fiscal year, assets in yen terms for the two banks actually declined.

Moreover, in 1988, the Japanese owned a whopping 38% of international banking assets. But following the slowdown last year, that figure stood at 35%.

Drain on Balance Sheets

Industry experts ascribe the erosion to a number of things. For one thing, they maintain, the risk-weighted Basel capital requirements are draining once-strong balance sheets.

Then there are sliding Japanese real estate values. The local market hasn't yet hit skids as steep as those in parts of the U.S. and Europe. But some fear the potential is there.

Such a collapse would badly strap Japanese banks, which have a combined 17% share of loans in real estate. Among some banks, exposure to the sector is as high as 40%.

Japan's banking and financial system also is heading into a period of sweeping deregulation. The process is already eroding earnings on deposit rates once protected by cartel-like industry agreements.

Rate Ceilings Abolished

Amid U.S. pressure, Japan has extensively dismantled such agreements, which set ceilings on interest rates paid to depositors. Washington has long held that such arrangements gave the Japanese an unfair advantage.

Yet another problem for Japanese banks has been the weak Tokyo stock market. The Nikkei stock index last Friday stood at 22,866.36, down 30.8% from the previous year. At one point in 1990, the index showed a 40% year-on-year decline.

The decline wiped out a large chunk of the value of banks' capital, because in Japan, 45% of unrealized profits on securities holdings count toward Basel capital ratios. The erosion forced banks to issue expensive subordinated debt.

Under such pressures, Japanese banks' earnings for the fiscal year declined sharply for the second consecutive year. Net assets shrank for the first time since World War II.

On average, earnings by Japanese money-center banks fell 23.4%, while their deposit base contracted 3.5%.

Among individual institutions, earnings by Dai-Ichi Kangyo Bank plummeted 35.5%. Profits at Mitsubishi Bank dropped 35.7%, while those at Fuji fell 18.5%.

Setback for Trust Banks

Aggregate earnings by the trust banks - the main money-management and custody institutions - plunged 41%.

In the wake of this poor showing, Japanese banks plan to launch broad-based layoffs and other cost-cutting programs. The 10 largest banks together employ more than 126,000 people. But in a nation where lifetime loyalty to a single company is still common, layoffs on a large scale may not be possible.

"We are hoping to cut personnel by natural wastage," said Mitsuga Ogawa, deputy president of Yasuda Trust and Banking Co.

In terms of capital, most Japanese banks by the end of March had edged their ratios above the 8% Basel minimum. But that is partly because in the fiscal year they issued $2.6 billion of subordinated debt, a move that cut heavily into operating spreads.

Margins Shrink

During the year, loan rates at Japan's six largest banks rose 207 basis points to an average of 7.95%, according to data compiled by the Japanese Banking Federation. But spreads fell 24 basis points, to 37 basis points.

The Basel requirements and the stock market decline also prompted Japanese institutions to sell assets.

At Bank of Tokyo, assistant director Mark Tousey denies that Japanese banks are fleeing international lending markets because of capital and other constraints.

"What is declining, though, is Japanese bank participation in syndicated loans whose yields fall below their minimum hurdles," he said.

Hard Look at Projects

Perhaps most conspicuously, bankers said, the Japanese may scale down their involvement in such high-risk projects as rehabilitating the brittle infrastructure in Eastern Europe. Hisao Kobayashi, international planning director of Dai-Ichi Kangyo, noted the region accounts for just 1.5% of Japan's foreign trade.

"DKB has received some proposals to finance in Eastern Europe," Mr. Kobayashi said. But other observers indicated the well for such projects in Tokyo temporarily has run dry.

At home, another wrinkle may be deregulation. Tokyo is moving cautiously to dismantle Article 65, which segregates the commercial banking and securities businesses. The law is similar to the Glass-Steagall laws in the U.S.

Commercial banks in Japan profess eagerness to enter the securities field. But privately, they acknowledge the move would require huge in investments at a time when pockets may not be deep enough.

Table : Japan's Top Five Ranked by assets; dollars in millions Fiscal year ending Percent World 3/30/91 3/30/90 change rankDai-Ichi Kangyo Bank $428,167 $403,386 6.1% 1Sumitomo Bank 409,161 368,167 11.1 2Mitsui Taiyo Kobe Bank 408,754 372,767 9.7 3Sanwa Bank 402,699 353,692 13.9 4Fuji Bank 399,545 362,575 10.2 5

PHOTO : COPING:Mitsuga Ogawa, of Yasuda Trust, and Hisao Kobahashi of Dai-Ichi Kangyo seek ways to stimulate growth.

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