Fitch Downgrades Japanese Banks

January 30, 2003
By David Ibison in Tokyo

Fitch, the global credit rating agency, on Thursday downgraded Japan's largest banks despite their attempts in recent weeks to boost their financial strength, indicating the agency believes nationalisation remains a strong possibility.

Citing the banks' weakening financial condition as well as Japan's declining sovereign rating, Fitch lowered its ratings on Mizuho, the world's largest bank by assets; Sumitomo Mitsui Financial Group; UFJ and Mitsubishi Tokyo Financial Group.

The downgrade of the 'Big Four' reflects the growing belief that the capital-raising measures being used by the three weakest, to stave off the threat of an injection of public funds, will fail to neutralise more than a decade of disastrous lending practices.

Bad debts at Japan's largest banks, including regional lenders, have swelled to about Y43,000bn ($360bn). This figure is set to rise once special inspections by the Financial Services Agency, beginning in two weeks, are completed in April.

To support their capital adequacy ratios, Mizuho has announced a Y1,000bn issue of preferred securities, SMFG plans to sell Y150bn in preferred shares to Goldman Sachs, and UFJ has sold Y100bn of loans to Merrill Lynch. MTFG has so far avoided such measures.

Fitch said that, although these moves were a positive sign the banks were taking their problems more seriously, they were insufficient to offset their fundamental weaknesses and would not alleviate the threat of an injection of public funds.

"Fitch continues to take the view that timely and adequate support to the banking system will be forthcoming from the government in the event of need," the rating agency said. It also expressed concerns about the measures taken by Mizuho to bolster its capital base through the issue of preferred securities to companies with which it maintained close relations. Such moves were eroding the quality of its core capital, it said.

Fitch believes such double gearing is dangerous to both parties and increases the risk of system-wide consequences should the bank's difficulties intensify.

The decision to downgrade the banks also reflects Fitch's frustration with the pace of economic and corporate reform in Japan. The agency was the first to coin the phrase "muddling through" to describe the reform process. "While Fitch has been hoping for decisive government action, to date there has been little more than discussion and study of these problems," it said.

Fitch lowered its long-term ratings on the four large banks by one notch and kept its outlook negative. It also downgraded most of Japan's other leading regional banks.

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