Japanese Bankers Disclose More Detail on Bad Loans

Major Japanese banks took another step Friday toward fuller disclosure of bad loans, but analysts said it is still impossible to be sure of the true extent of the problem.

In reports on their performance during the first half of the current fiscal year, Japan’s 11 “city banks”--the country’s largest banks in terms of deposits--released statistics on “restructured” loans for the first time. As has been done previously, the banks also released information on “non-performing” loans.

In “restructured” loans, interest payments from borrowers to the banks have been reduced, whereas payments have stopped entirely in the case of “non-performing” loans.

The Finance Ministry reported earlier this month that the entire Japanese financial system is burdened by about $370 billion in bad loans, the total of restructured and non-performing loans.

Of this sum, about $250 billion will ultimately prove unrecoverable, the ministry estimates. Without releasing a bank-by-bank breakdown, the ministry said in mid-November that the 11 major commercial banks hold about $130 billion of the bad-loan total.

The banks’ announcements Friday, made under pressure from the Finance Ministry for more open disclosure, mark the first time that a group of major banks has publicly disclosed figures for all categories of bad loans.

This is a step toward allowing analysts, investors and depositors to make more accurate judgments about the stability of individual banks--something that has been extremely difficult in Japan’s opaque banking system.

Fuji Bank, Japan’s fourth-largest in terms of deposits, reported the highest figure for restructured loans: $10.6 billion. This was in addition to $12.4 billion in non-performing loans. Dai-Ichi Kangyo Bank, by contrast, reported $12 billion in non-performing loans but only $2 billion in restructured loans.

The release of such statistics, however, is still far from sufficient to put to rest a debate over the true size of Japan’s bad-loan problem.

Part of the continuing lack of clarity comes because banks define restructured loans as those that have been renegotiated so that the interest rate is less than Japan’s discount rate. That rate--the interest banks pay to the Bank of Japan to borrow money--was recently reduced to an extraordinarily low 0.5%.

This means that in many cases it is possible for the banks to grant sharply reduced interest rates and still avoid needing to classify those loans as “restructured.” Although it is difficult to predict what percentage of such loans will ultimately prove uncollectible, analysts say a significant portion may be bad.

Under a broader definition than used by the banks, “the true figure for restructured loans is much greater than what’s being announced,” said J. Brian Waterhouse, a banking analyst at James Capel Pacific Ltd.

“As fast as they write off the bad loans, new bad loans step forward to take their place,” Waterhouse said.

Many private analysts, using definitions such as would be applied in the United States, estimate the true figure for total bad loans in the Japanese banking system in the range of $600 billion to $800 billion.