Japanese banks profits to remain flat through 2012

But Japanese banks should have little problem getting their tier 1 capital up to 7% through profits, says Fitch.

Fitch Ratings said in a special report that the Japanese major banks are likely to see flat profitability for the financial year ending March 2012 and over the medium-term, due to a low interest rate environment. Fitch's expectations of slow accumulation of retained earnings and no new common equity-raising in the foreseeable future mean that no changes to the major banks' Individual ratings are envisaged for the near term.

Although Fitch expects no significant growth in net interest revenue, it also expects the major banks' loan loss charges to remain within a manageable range of 0.2%-0.5% of total loans in the financial year ending March 2012 and over the medium term, which should be covered by pre-provision operating profit.

Fitch expects no additional common stock issuance by the major banks, as their internal capital generation should alone be sufficient for the banks to comply with the new regulatory core capital ratio, a total of 7%, by 2019. However, if the banks were to alter their capitalisation by, among other things, issuing innovative capital instruments including contingent convertible securities and/or due to M&A activities, it would increase the pressure on their Individual ratings.

Meanwhile, the individual ratings may also come under pressure if profitability suffers from a weakening of loan quality, especially if loans to TEPCO are forgiven or restructured, and from a delay in the banks' de-risking efforts.

The Long-Term Issuer Default Ratings of some of the major banks may be downgraded following the Outlook revision of Japan's sovereign rating to Negative from Stable on 27 May 2011, should Fitch assess the sovereign's propensity and/or ability to support the major banks as substantially reduced.