Rising Interest Rates Squeeze Japan's Banks
Like banks in the United States, Japanese banks are suffering the pains of higher interest rates. In Japan, too, the rates are eroding banks' asset quality, according to a recent report by Fitch Investors Service.
Resulting interest costs are slicing the banks' trading profits as activity slows in the bond market, and the value of their investment portfolios is declining.
The high interest rates are also making it harder for borrowers to service their debt, putting the banks at greater risk.
"The whole cash flow situation has eroded in a number of Japanese corporations," said Fay Wong, a vice president at Fitch.
Now the corporations' investments are not generating the returns the companies had sought, and many borrowers find themselves hard pressed to keep up with lofty interest payments.
"High interest rates have weakened the debt service capabilities of many corporate borrowers," the Fitch report said.
Japan's short-term prime rate began rising in July 1989 from 4.9%, according to data provided by Salomon Brothers Inc. The rate climbed to 8.25% by this April. Since then the prime rate has fallen back to 7.88%, but it remains well above the level of two years ago.
Japanese banks have long been big lenders to these corporations. But during the 1980s, many of the companies borrowed heavily to invest in the soaring Japanese stock and real estate markets.
City Banks Feel Pinch
The city banks tend to have the largest proportion of their assets tied up in corporate loans, in some cases more than half their assets. Dai-Ichi Kangyo Bank, with about $443 billion in assets, probably has the largest portfolio of domestic corporate loans, Fitch said.
And while Japanese banks used to help troubled borrowers, often making new loans to help them pay off the old, capital constraints now make such new lending difficult.
The shape of the yield curve is adding to the problems of the city banks, according to an analyst at Merrill, Lynch & Co. Short-term rates are higher than long-term rates, so city banks that fund themselves in the short-term market are finding it next to impossible to lend at rates much above where they borrow. That means the banks are generating little or no profit growth, and adding only minimally to the capital base they need to work with borrowers.
Unfortunately, a cut in rates does not appear imminent.
"We probably won't see any relief until yearend," Ms. Wong said. The Bank of Japan is "very paranoid about keeping inflation down," she added, and high interest rates are intended to do just that.
Table : Anemic Profits For Japanese Banks Fiscal 1991 pretax earnings(*) Percent (In millions) changeSumitomo Bank $1,628 -8.4%Sanwa Bank 1,558 -3.1Fuji Bank 1,487 +2.0
Dai-IchiKangyo Bank 1,345 -0.5Mitsubishi Bank 1,310 +0.5
Industrial Bank of Japan 984 +4.5
Long-Term CreditBank of Japan 673 +1.1Bank of Tokyo 637 +5.8
Sumitomo Trust and Banking Co. 602 0 (*)Bank estimates, plus or minus $35 million Data converted from yen using March 29 exchange rate. Source: Fitch Investors Service