4 Leading Japanese Banks Report $31 Billion in Losses

Reviewed by Hitoshi URABE

Article:
"4 Leading Japanese Banks Report $31 Billion in Losses"
(By Ken Belson) The New York Times
http://www.nytimes.com/2003/05/26/business/worldbusiness/
26CND_YEN.html

Comments:

It is the season for companies to report their performances. Just about all of the companies in Japan have their end of fiscal set at the end of March, and for most of them it is only customary, if not with the practical intention of diluting the effect of announcement of their results, especially when they are not favorable. Banks, however, being in a tightly regulated industry, are legally required to set their reporting term at the end of March. This makes it easier for analysts and critics to compare figures, as well as the regulators for which the requirement was placed in the law in the first place.

The recent restructuring and reshuffling of Japanese banks made it a little complicated to go through the analyses exercise, however. While the NY Times article above, along with a number of other reports, compares four banks (technically baking 'groups'), others, including The Nikkei Newspaper, puts up 7 banks on the list to compare against each other and summarize as a whole. Which is suitable depends on what you are looking for, of course, but one must be aware that the difference in approach might provide different pictures. Just for an example, whereas comparing seven banks would lead to saying that Sumitomo Trust could have the healthiest capital structure due to the smallest ratio it relies on deferred tax assets, the sheer size of the bank would prevent it from being called the leader of Japanese financial industry.

Current discussion on Japan's banks always makes reference to 'deferred tax assets.' It has been reported that the recent Resona affair, where the fifth largest banking group has asked for a governmental bailout, was triggered by their auditors for denial of certain portions of their deferred tax assets to be included in their capital base, and at the last moment. The incident leads, in one way, to the very fundamental question, again, on the function and responsibilities of auditors. But here, perhaps a little insight on this deferred tax asset might help understand the situation better.

One of the reasons for the treatment of deferred tax assets to have become so ambiguous is because of the peculiar tax system applied in putting up loan loss provisions.

When certain level of deterioration is detected in their loans, which means a certain level of risk of not being able to regain what was lent becomes evident, it is prudent, and has been acknowledged as a sound accounting practice, to acknowledge it as a loss on the books. This is to anticipate for the realization of the loss at the end of the day, and, instead of simply decreasing the amount of what is being lent, the procedure is to record the amount by putting up a loan loss reserve. It is, as stated above, a loss, or a cost in accounting terms, which brings down net profit of the company.

The problem here is that the tax authorities take a different view, that since the amount of actual loss is undetermined at that point, they would not allow it to be deducted from income, effectively denying as a cost. (To be clear, the taxation office would allow it to be booked as a loss in tax terms when the assets are finally proven to be unrecoverable, such as after all related litigations are concluded.)

So, while an agency of the government, The Financial Services Agency, forces banks to put up reserves in anticipation of future losses in the hope to maintain healthy banks, another arm, National Tax Agency effectively denies, or at least undermines such an endeavor. This has resulted obviously as a heavy burden on the banks, where the government is compelling for banks to book losses that cannot be regarded as cost in terms of taxation, while at the same time pressing to come up with enough profit to buildup their capital base.

Managers of Japan's banks may not be relieved of their responsibilities for the poor results, but there could be areas where the government might sort out their policies.