Japan banks hammered on negative outlook

By Alex Frew McMillan
CNN.com senior writer

TOKYO, Japan -- Japanese bank stocks took a beating Thursday after a morning bloodbath. They were driven down by negative comments from a rating agency and fears about bad loans.

Wednesday evening, the Fitch agency put 19 Japanese banks on a negative rating watch. That means Fitch has a negative view of the banks' financial strength.

The list includes all of Japan's big banks, including Mizuho Holdings, the world's largest bank by assets, Sakura Bank, the Bank of Tokyo-Mitsubishi and Sanwa Bank.

Jason Rogers, Fitch's financial-institutions analyst for Japan, blamed crumbling Japanese stock prices and problem loans.

Rogers said capital reserves at Japanese banks would drop below the necessary 4 percent if the Topix index falls below 1,000.

Tokyo's Topix, a broad market index, closed at 1,184, up 1.9 percent. The benchmark Nikkei 225, which has a stronger technology weighting, finished a traumatic Thursday up 2.6 percent to 12,153.

The indexes rallied after a horrible morning. But bank stocks told a different tale.

Virtually all closed down. They had already been dropping this week.

On Thursday, Mizuho Holdings lost 6.2 percent, Sumitomo Bank dropped 5.0 percent and Sakura Bank lost 4.2 percent. They had all started with plunges of around 10 percent.

The reaction was sharp, for a staid industry. It was particularly shocking since Fitch had been mulling the move for some time.

"If you were surprised by Fitch's move, you must have been in a coma for the last year," Rogers said.

It may have played into speculation about an imminent bank crisis in Japan. Rumors have swirled about the solvency of banks such as Mizuho and Daiwa.

On Thursday, both banks denied they were facing financial difficulties.

A spokesman for Mizuho said the bank plans to write off bad loans by March 31, the end of the fiscal year, but has not settled on the amount.

"Of course we have bad loans, but our assets are adequate," Yukio Yokoyama said. "There's no reason we're going bankrupt."

Analysts downplayed the risk of an immediate bank crisis. But the problems facing the industry are severe.

The banks are carrying a huge amount of bad loans on their books. Economists say they may amount to more than $250 billion, or 6 percent or more of Japan's gross domestic product.

Banks were able to compensate for bad loans by selling other assets, such as stock. But with the Nikkei near 16-year lows, they no longer have that flexibility.

The banks also own a large amount of stock in corporations, and corporations in the banks. Such "cross-held" shares are down substantially.

The banks have to reflect the actual price of their holdings by September. Analysts fear the bottom could drop out of the stock market if banks sell off their cross-held shares.

The Japanese government last Friday proposed the creation of a private fund to absorb losses from sales of cross-held shares.

Japan's banking watchdog, the Financial Services Agency, has promised a package by the end of March to help banks with bad loans.

The Japanese government would likely step in to prevent a banking crisis.

Fitch's negative outlook applied only to individual banks. The agency kept the same long-term outlook on banks because of the probability of government support.

"We're getting to a confidence crisis rather than an immediate banking crisis," Rogers said. "I don't think it's time to start panicking yet."

Reuters contributed to this report.

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