Financial Sector

October 2005

Legal Revision on Banking Agents Passes
A revision to the Banking Law that would allow companies to be agents for banks was enacted Wednesday after it cleared the House of Councilors. The law, to be implemented in April, will allow nonbank companies, such as convenience store chains, travel agencies and car dealers, to act as banking agents and provide foreign exchange, deposit and lending services, if they are approved by the Financial Services Agency.
Under the current Banking Law, only banks' wholly owned subsidiaries can be banking agents. The House of Representatives approved the revised law last week. The deregulation of banking agents is expected to benefit customers by giving them better access to financial services, for example by making it easier to open new bank accounts or enabling the sending of remittances from convenience stores or supermarkets. It is also expected to benefit financial institutions by allowing them to expand their service windows. The amendment will also enable other nonbank financial institutions, such as community-based "shinkin" banks and agricultural cooperatives, to serve as bank agents. The FSA estimates around 500 firms will enter the new business in fiscal 2006. To protect depositors, the financial regulator plans to impose a set of strict rules on bank agents, including controls on customer information and FSA inspections. The amendment will also prohibit bank agents from extending loans to business clients in return for the clients agreeing to make deals with the agents in the latter's main business areas. Under the amendment, banks will be liable for any damages customers suffer in connection with agents. (The Japan Times, October 27, 2005)

Supermarket Bank Counters Coming Soon
In the near future, people may exchange money at travel agencies and open savings accounts in supermarkets. On Thursday, the House of Representatives passed a set of bills that would allow nonbanking firms to offer financial services on behalf of banks. The revisions to the law are aimed at broadening the retail networks of banks and increasing consumer convenience. If the bills clear the House of Councilors as expected, the changes would take effect in April. The bill package states that retailers, hotels and other companies can provide financial services as agents for banks. The firms receive bank commissions as payment. Customers would be able to open bank accounts, withdraw cash, exchange money and possibly even apply for loans at the retail outlets. The financial services providers would need to be approved by the Financial Services Agency, which would scrutinize their credibility and financial health. Under current legislation, only banks and their wholly owned units can handle bank transactions. While the change would bring greater convenience to customers in this still cash-reliant country, deregulation here is far behind the U.S. and Europe, industry experts said. Deregulation "will boost the number of service counters and I see that as a positive," Terunobu Maeda, chairman of the Japanese Bankers Association and president and CEO of Mizuho Financial Group, told a news conference earlier this week. Some experts have said if the legislation is enacted, it would help banks that do not have many branches in rural areas by enabling them to offer services through local agents. Naoko Nemoto, a senior analyst at credit rating agency Standard & Poor's, said the deregulation would boost the banks' efficiency. "We may not see a big impact soon," Nemoto said. "But if banks make good use of it, the deregulation would lead to reductions in costs." But few firms have expressed interest in the new business, as there is uncertainty about how profitable it would be to operate a service counter. "We are studying financial businesses, including acting as a bank agent. But nothing has been decided yet," Motoya Okada, president of supermarket chain Aeon Co., told reporters earlier this month. Manabu Oshima, in Aeon's corporate communications department, said the company is looking at whether deregulation would lead to higher profits. Seven Bank, a subsidiary of major retailer Ito-Yokado Co., already operates more than 10,000 automated teller machines nationwide, primarily at Seven-Eleven convenience stores. "The bank is interested in offering agent services to increase its business options for generating profit," said Kenichi Yamamoto, a spokesman for Seven Bank. Seven Bank -- whose main business is the ATM operation -- would be able to provide a wider range of services by becoming a bank agent, he said, but added that the firm did not have a plan in place to become an agent. To help gauge demand, the company in April opened its first outlet in an Ito-Yokado supermarket in the city of Chiba. The bank also plans to build four new outlets by the end of March in Tokyo and surrounding regions. Observers have said that through opening the branches, Seven Bank could be preparing to become a bank agent in the future. Nomura Securities recently said it was considering entering the banking-services business but has no specific plan. While most companies are waiting to see what happens, analysts have said revisions to the law would encourage interested firms to enter the financial-business market. "It may make it easier for more companies like Toyota, which has a car dealership network, and Rakuten to become bank agents," said S&P's Nemoto. (The Japan Times, October 21, 2005)

6 Big Banking Groups See Interim Net Profit at Record 1.3 Trillion Yen
The nation's six major banking groups are estimated to have generated a combined consolidated net profit of 1.3 trillion yen for the first half ended Sept. 30, a record for an interim period. All were in the black, lifting their combined profit from the year-earlier 80 billion yen. The sharp gain was due mainly to a reduction in bad-loan disposals. Such expenses topped 7 trillion yen in fiscal 2001, but had since declined to some 2 trillion yen as of March 31, 2005. UFJ Holdings Inc., which integrated this month into Mitsubishi UFJ Financial Group Inc., apparently generated the largest first-half net profit of 330 billion yen. UFJ had initially anticipated a 140 billion yen net profit -- but thanks to improvements in the earnings of major borrowers, loan loss reserves were converted back into profit. The combined net profit figure for UFJ Holdings and Mitsubishi Tokyo Financial Group Inc. is believed to reach 560 billion yen, similar to Toyota Motor Corp.'s 550 billion yen and among the highest in the nation. Mizuho Financial Group Inc.'s net profit is believed to have risen more than 10% on the year to around 270 billion yen, while Sumitomo Mitsui Financial Group Inc.'s figure is seen as having more than quadrupled to more than 200 billion yen. These figures are similar to the 240 billion yen earned by such companies as Nissan Motor Co. and NTT DoCoMo Inc. The banks have also marked profit gains from mainstay operations. MTFG's core business profit is said to have reached 320 billion yen, topping a prior forecast by 35 billion yen. Its commission revenue rose thanks to brisk sales of such products as investment trusts and individual annuities. Lending to small and midsize companies and real-estate-related loans also helped drive bank earnings up. Thanks to their solid results, the banking groups are likely to boost dividends. The Mitsui Trust Holdings Inc. group plans to hike its annual dividend from 2.5 yen last year to 4 yen. Mizuho is eyeing plans to boost its dividend from 3,500 yen to 4,000 yen as early as fiscal year-end. SMFG is considering a dividend hike as well. The six banking groups are on track to earn a combined net profit sharply above 2 trillion yen for the full term ending March 31, 2006. (The Nihon Keizai Shimbun, October 19, 2005)

Major Banking Groups Still Need to Improve Quality of Capital
The nation's six major banking groups are expected to post a combined record net profit for the fiscal first half ended Sept. 30, but they still have a long way to go before they can measure up to such companies as Toyota Motor Corp. that generate brisk earnings entirely on their own. While the earnings of major banks are recovering at a rapid clip, their capital continues to be underpinned by public funds infused in the past or deferred tax assets. They must now leverage their brisk earnings to overcome these issues and create structures that enable them to compete with overseas financial institutions. Banks book deferred tax assets on the assumption that the disposal of non-performing loans will result in future tax refunds. Banks with a lower percentage of deferred tax assets comprising their core equity capital are deemed more financially sound. Sumitomo Mitsui Financial Group Inc. and others, however, have percentages topping 40%, indicating the need for improvement. The fiscal first-half results of six major banking groups are said to have been given a lift by the conversion of loan loss reserves back into profit. This shows that the cleanup of non-performing loans continues to have a major impact on banks' earnings and that the quality of capital at these institutions has not changed. The public funds infused by the government into the banking groups also continue to reinforce their capital. Banks have been able to borrow funds at roughly no cost thanks to the Bank of Japan's ongoing zero interest rate policy, allowing them to eke out profits by lending that money. Banks are making an effort to pay back the public funds, but it remains uncertain whether they will be able to secure stable earnings without supportive measures in place. The profitability of Japanese banks also continue to trail those of major overseas financial institutions. U.S.-based Citigroup Inc. announced Monday that its net profit for the July-September quarter totaled around 820 billion yen, which is higher than the figure for Japan's six major banking groups combined. (The Nihon Keizai Shimbun, October 19, 2005)