Japan's top three banks, including leader Mizuho Financial Group, posted a return to annual profit on Monday but forecast flat to lower earnings for this year, underscoring worries about their fragile recovery from a decade of bad loan problems.
Most banks' charges for bad loans were falling, analysts said, but now they needed to concentrate on how to generate higher profits, since their income structure still relied heavily on volatile holdings of stock and bonds.
"Overall core operating profits are not expected to show much improvement given the ongoing decline in loan books and intense competition for new business, but of particular interest will be the progress the banks have made with respect to increasing the contribution of non-interest income sources," said Jason Rogers at Barclays Capital.
UFJ Holdings and Resona Holdings, respectively the fourth- and fifth-biggest banks, both reported annual losses for the year that ended in March as they still needed to set aside big provisions for bad loans, although they expect to be in the black this year.
Mitsubishi Tokyo Financial Group (MTFG) scored the biggest profit of the top three banks in 2003/04 with 560.82 billion yen ($4.99 billion).
Mizuho, which had Japan's largest corporate loss ever the previous year, booked a group net profit of 406.98 billion.
However, underlining analysts' worries about their ability to strengthen their profit base, both forecast lower profits this year, at 340 billion yen and 330 billion yen respectively.
Sumitomo Mitsui Financial Group Inc also forecast profits of 330 billion yen, almost exactly the same as 2003/04.
Shigemitsu Miki, president of MTFG, which is reckoned to be financially sounder than its rivals, conceded the difficulty of finding sound borrowers, saying MTFG had raised lending by 1.2 trillion yen in the past two years, but corporate loans accounted for just 100 billion of that.
"We are struggling to raise spreads. We aim for a rise of 20 basis points but it looks very ambitious," Miki told reporters.
The top banks' return to profit last business year was in large part due to a 47 percent rise in Japanese share prices, which boosts the value of their huge stockholdings, and a windfall tax refund from Tokyo city government.
A general fall in bad loan charges also helped.
The top seven banking groups all saw outstanding bad loans drop from a year ago, even UFJ with its raised bad loan charges, reflecting a general improvement in banks' balance sheets.
Financial Services Minister Heizo Takenaka said the ratio of bad loans to total loans was 5.2 percent at the end of March, so banks were close to a target of four percent by next March.
The top seven banks said their bad loans at end-March came to 14 trillion yen, down a third from 20.84 trillion a year ago.
Their combined loan-loss charges of 3.76 trillion yen were down from 5.09 trillion yen in March 2003. It was the first time in 11 years that bad-loan clean-up costs were smaller than their combined operating profit.
UFJ, the smallest of Japan's top four banks, posted a net loss of 402.81 billion yen in 2003/04, its third annual loss in a row, and said top officials would resign to take the blame, but it forecast a profit of 330 billion yen for this year.
"My impression (on UFJ) is positive as it is clearly pushing forward with its bad loan resolution," said Nobuki Goto, general manager of investment research at Tokio Marine Asset Management.
Resona, bailed out last year with nearly 2.0 trillion yen in taxpayers' money, posted a group net loss of 1.66 trillion yen for 2003/04 but also said it would be back in the black this year with a projected group net profit of 170 billion yen.
UFJ said it had 1.311 trillion yen in loan-loss charges in 2003/04, nearly triple its initial forecast as it was forced to reassess its loan portfolio after a government inspection.
But UFJ Holdings President Takeshi Sugihara told reporters the group had decided on its own, without pressure from the government or auditors, to raise loan loss charges.
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