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Top Japanese Banks Book Losses

11/14/2012 | 06:06am US/Eastern
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--Big Japanese banks suffer combined Y534 billion loss in the fiscal first half related to equity holdings

--MUFG reports a 58% tumble in net profit for first half

--Mizuho's net profit tumbles 28% on year, while SMFG's gains 5%

TOKYO--Japan's top three banks booked combined write-downs of over Y600 billion ($7.5 billion) in the fiscal first half ended Sept. 30 from their equity holdings especially in the country's struggling electronics makers, though continued gains from bond trading softened the blow.

While Sumitomo Mitsui Financial Group Inc. (>> Sumitomo Mitsui Financial Group, Inc.) still managed to post a moderate gain in first-half net earnings, net profits at Mitsubishi UFJ Financial Group Inc. (>> Mitsubishi UFJ Financial Group Inc.) and Mizuho Financial Group Inc. (>> Mizuho Financial Group, Inc.) dropped, as spiraling losses at the country's electronics makers sent the value of their shares sharply lower.

Japan's largest bank, MUFG, which has about a 22% stake in Morgan Stanley (>> Morgan Stanley), reported a 58.3% tumble in its group net profit to Y290.48 billion for the six-month period. That compared with a Y696.09 billion profit in the same period a year earlier. The fall was also ascribed to a high basis of comparison a year earlier, when MUFG enjoyed a one-time gain from the conversion of its holdings of preferred shares in Morgan Stanley into common shares.

Weak financial market conditions weighed on MUFG's profits, forcing it to book a write-down of Y186.9 billion from its equity holdings.

The other two banks' profits were also dented by write-downs from equity holdings. Mizuho reported a 27.6% fall in net profit on year for the half, to Y184.28 billion. SMFG managed to rack up a 5.5% on-year gain in net profit to Y331.04 billion, as a decline in valuation reserves related to deferred tax assets at its core banking unit helped cancel out losses on equity holdings.

The results underscore how Japanese banks' profitability is sensitive to market volatility, although they remain relatively unscathed from the euro-zone crisis and the global economic downturn.

As Japanese banks have traditionally held big stakes in their affiliates and clients to cement ties, they are vulnerable to stock market declines, which could force them to book valuation losses on their holdings.

The Nikkei Stock Average dropped about 12% during the April-September period, in part due to concerns over global market instability sparked by the European debt crisis.

The Tokyo market has continued to tumble since the end of September. During the fiscal first half, a slump in Japan's once-vaunted consumer electronics industry deepened, and major companies such as Panasonic Corp. (>> Panasonic Corporation), Sharp Corp. (>> Sharp Corporation) and Sony Corp. (>> TAMURA CORPORATION) suffered from hefty losses, challenged by a stronger yen and tougher competition with Asian rivals.

"It's not about one electronics maker, but the consumer electronics industry as a whole has been quite damaged," said MUFG President, Katsunori Nagayasu. He noted that the sector was slow to restructure and failed to respond to changes in the business environment, although he said his bank continues to support the industry.

The three banks are making efforts to reduce cross-share holdings, a long-standing tradition among big Japanese companies.

"We've been making efforts to reduce share-holdings," said Mizuho President Yasuhiro Sato. "How we reduce them is an important mission for us," he added, noting that care was needed in selling the shares of clients so as not to undermine their share prices.

Although major banks continued to post gains from bond-trading activities, which have been a key contributor to profits in recent years, the gains will likely tamper off. SMFG President Koichi Miyata said his bank doesn't expect significant gains from bond-trading in the second half.

A more promising area for Japanese banks is overseas operations. The executives of all three banks said they expect a continued rise in overseas lending, particularly in Asia, amid growing demand for loans for such things as infrastructure.

All of the banks' earnings are based on Japanese accounting standards.

Write to Atsuko Fukase at atsuko.fukase@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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