Japanese Banks, Brokerage Underperform as Japan Enters Recession

Anyone watching the performance of Japanese banks and brokerages lately probably wasn’t surprised by Japan’s official declaration of a recession Monday following the release of negative third quarter GDP figures.

Exposure to the global credit crisis has hit the credit and equity performance of Japanese banks and brokerages hard, and a government economic minister warned the economic situation is getting worse.

CreditSights’ weekly recap of global financial institutions pointed out that while Asia-Pacific bank stock performance was negative, down 4 percent on the week ended Nov. 14, the Japanese bank and broker sector fell 12 percent.

Sumitomo Mitsui Financial Group’s (SMFJY) 51-percent drop in profits reported for the period ended Sept. 30 was accompanied by a full-year forecast of a 61 percent earnings drop, CreditSights noted.

Meanwhile, Standard & Poor’s highlighted the dismal second-quarter results of Japanese brokerages Daiwa Securities Group (DSECY), Nikko Citi Holdings Inc. and, notably, Nomura Securities (NMR), whose broad exposure to the credit crisis prompted a ratings downgrade from S & P.

The ratings agency noted that all three banks came into the global crisis with strong capitalization, which could absorb earnings declines going forward, with a caveat:

The ratings may come under downward pressure if losses from trading positions increase significantly due to continued turmoil in the global financial markets, or if earnings do not recover due to a prolonged slump in the Japanese securities market.

Stock trading volume by individuals dropped 26 percent in the second quarter, said S & P, and with Japan’s stock market remaining under pressure, as well as the sharp rise in the yen, the ratings agency is not looking for an immediate rebound in the sector.