17 Years Later, Japan's Banking Sector Roars Back (MTU)

Do you remember what you were doing 17 years ago? It's been that long since Japanese banks have been as profitable as they are now. In fact, an article published today by the Japanese daily Yomiuri Shimbun reported that profits increased 3.2x year-over-year for Japan's 126 banks in the year ended March 31st. The aggregate 4.23 trillion yen ($36.4b) after-tax profit easily tops the bubble peak (year ended March 31, 1989) figure of 2.34 trillion yen ($20.1b at current exchange rate or $17.7b at then current exchange rate of Y132.55/US$1).

A major reason for the resurgence of the banking sector is the cleaning up of balance sheets by resolving (disposing) nonperforming loans (NPLs). The Yomiuri article stated that nationally NPLs fell y-o-y by 1.06% in the year ended March 31st to 2.90%. Metropolitan banks' NPLs dropped to 1.80% but regional banks and secondary regional banks remained rather high at 4.40% and 5.27%, respectively.

By the end of the year all three Japanese mega banks will have repaid money owed to the government for earlier bail outs. Mitsubishi UFJ Financial Group (MTU) is the first of the three to have repaid the public funds. Mizuho Financial Group (Tokyo: 8411) is set to repay funds early next month as it looks to list shares on the NYSE (NYX) by the end of September.

The profitability of banks should be further enhanced when interest rates rise and banks can earn a better spread. CAPEX has been heavy in anticipation of the Bank of Japan raising rates, thus I would expect profits to really take off a quarter or two after the rate hikes begin -- at this point I'm eyeing the Jan.-Mar. 2007 quarter.

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