US ratings agency Standard & Poors Corp (S&P) said on Friday it reckons problem and questionable loans weighing on Japans financial sector total 100 trillion yen ($769 billion), much higher than Japans own estimate.
The Ministry of Finance (MOF) said in January that about 76.7 trillion yen of problem and questionable loans were held by Japanese banks, based on calculations by the banks last year.
Naoko Nemoto, an S&P associate director in charge of financial institution ratings, said on Friday: We estimate that problem (and questionable) loans of the industry are over 100 trillion yen.
She told Reuters Financial Television (RFTV) that S&P was still concerned some major Japanese banks were in a very serious condition and have very high problem loans.
While the S&P estimate included problem loans at smaller financial firms such as credit cooperatives, Nemoto said: We think credit self-assessment (by financial institutions) does not fully cover total problem loans.
Under MOFs appraisal method, there are three classifications for problem and questionable loans.
Problem loans are defined as loans considered impossible to recover as well as those made to firms with management difficulties but which are in no immediate danger of bankruptcy. Questionable loans are those where the creditworthiness of a borrower raises concerns that recovery may be more difficult than with ordinary obligations.
Nemoto said S&P was concerned that Japanese government provisions for injections of up to 30 trillion yen of public funds into the financial sector would not be sufficient because of the massive size of problem loans.
Some analysts said they were not surprised by S&Ps estimate because Japanese banks are facing an increasing number of corporate bankruptcies at home due to the slump in the countrys economy.
One analyst said: How many years will it take Japanese banks cleans up their mess after disposing of trillions of yen of bad loans?
Major Japanese banks have already disposed of about 38 trillion yen in problem loans over the past eight fiscal years including about 10 trillion yen in 1997/98, she said.
The economic turmoil in other Asian countries is another concern because of the banks high loan exposure to the region.
James Fiorillo, an ING Baring Securities (Japan) analyst, said in a report: While our initial major bank estimate for Asian-related non-performing loans was three trillion yen, we now believe the actual amount could be double that.
To tackle the mess and clean up their balance sheets, Japanese banks are accelerating the sale of property-backed problem loans to foreign investors.
US and European financial firms are snapping up those loans, betting Japans battered real estate market is nearing bottom.
On Friday, major Japanese commercial bank Sumitomo Bank said it sold about 100 billion yen worth of non-performing loans to a US financial institution at the end of March.
It was the banks largest-ever sale of non-performing loans. At the end of September 1997, Sumitomo sold non-performing loans totalling about 40 billion yen.
Another major Japanese bank, Sakura Bank, sold 400 billion yen worth of problem loans to two major U.S. financial companies before the end of March at about 15 percent of the loans book value, industry sources said.
We think foreign firms intend to buy up to five trillion yen of problem loans, a banking source said.
