Japan's banks hope for the best

Profits are being promised for the year just started by Japan's beleaguered banking sector, after many of the country's biggest financial institutions reported a second year of losses.

One bank - the only one owned by foreigners - has even managed to show a solid profit, albeit a smaller one than last year.

But a closer look at the numbers shows that the core assets underpinning the banks' finances are dangerously shaky in some cases, analysts say.

The worry is that the lower capital reserves will prevent them from pushing through the clean-up of the trillions of yen in bad loans which is hobbling the financial system.

They are also struggling to survive huge losses on their shareholdings in other companies.

Concerns have been heightened by the government's decision last week to bail out Resona, the country's fifth biggest bank.

In the red

The largest of Japan's "megabanks", Mizuho, brought in the worst loss in Japanese corporate history, amounting to 2.38 trillion yen ($20.3bn; £12.4bn) - although it promised to return to the black in 2003/04.

The smallest of the four, UFJ, was also bullish in its forecasts for next year as it reported losses halved from last year to 608bn yen ($5.2bn; £3.2bn).

Resona announced its 838bn yen loss was narrower than last year - but was still three times what the bank had earlier predicted.

Mitsui Trust, the seventh biggest bank, saw its losses widen, while Sumitomo Mitsui Financial Group (SMFG), which fills the number two spot, saw its losses stay almost unchanged at 465bn yen.

But Shinsei, which used to be the government-controlled Long-Term Credit Bank before being sold to a US consortium last year, turned in a 53bn yen profit, although US bond losses meant the gains were lower than last year.

Tax breaks as assets

The real picture, though, can be found in the statistics relating to the banks' huge losses on shareholdings and their massive book of debts gone bad, analysts say.

In some cases, such as UFJ, the amount having to be spent on the delinquent debts of large corporations has shrunk in the past year.

But UFJ also acknowledges that 59% of its core capital consists of so-called deferred tax assets (DTAs), which are tax credits expected to arrive once borrowers with bad loans go bankrupt.

But they can only be triggered if the bank has taxable profits, and in any case critics say that many of the borrowers are only kept afloat by the banks themselves, so as to avoid admitting the full extent of their bad debt problems.