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Loan-loss reserves hit lowest level in 32 yrs

Jiji Press TOKYO (Jiji Press) — The total amount of loan-loss reserves booked by major Japanese banks to prepare for bankruptcies of client companies has hit the lowest level in more than 32 years.

The reserves, held at five major banks, stood at ¥901.6 billion as of the end of September, down 13.4 percent from a year earlier, falling below one trillion yen for the first time since February 1985.

The drop, reflecting a decline in corporate bankruptcies due to economic recovery, helps bolster earnings at banks, many of which are struggling under the Bank of Japan’s negative interest rate policy introduced in February last year.

In the late 1990s, many financial institutions went bust due to bad loans following the collapse of Japan’s bubble economy. Among them were Hokkaido Takushoku Bank, a major commercial bank, Yamaichi Securities Co., one of Japan’s Big Four brokerage firms, and former Long-Term Credit Bank of Japan.

Many nonfinancial businesses also failed during the financial crisis, forcing banks to build up massive loan-loss reserves. In April 1998, the total balance of reserves at then major banks peaked at ¥9,926.5 billion.

Now the balance is on the decline. Many lenders have disposed of the bulk of their nonperforming loans, and corporate earnings are robust.

The balance at major banks has fallen to one-10th the peak level. Even at 64 regional banks across the country, loan-loss reserves as of the end of September this year fell 7.4 percent from a year earlier to ¥1,195.6 billion, to lowest in 21 and a half years.

Financial institutions are allowed to reverse loan-loss reserves if earnings at their client firms improve.

Japan’s three megabanks — Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Mizuho Bank — booked over ¥200 billion in profits from the reversal of loan-loss reserves for the six months through September, pushing up their bottom lines.

“The balance of loan-loss reserves has already dropped substantially,” a senior official at a major bank said. “We can no longer expect big profits from the reversal of the reserves.”Speech

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