NEW YORK (MktNews) - The weak financial fundamentals of Japanese banks remain a concern and important structural changes to the banking system are unlikely to occur in the short term, Moody's Investors Service said in a statement Wednesday.
Moody's believes that the decline in local stock market prices, ongoing credit expenses, and the banks' unrealistic reporting of asset quality problems are all negative factors that will continue to put pressure on the Japanese banking system.
Furthermore, there seems little likelihood of changing the major banks' vulnerability to stock market volatility, which Moody's considers to be the weakest spot in the Japanese banking system.
Moody's has recently completed an assessment of the Japanese banking system in a Special Report entitled "Japanese Banks in Another Crisis: What has changed? What will change? What would be difficult to change? Time to revisit Management Improvement Plan?"
"When one looks at the financial fundamentals, it is difficult not to have a pessimistic view of the sector," says Moody's.
"The issue of the banks' vulnerability to stock market decline has essentially remained unaddressed for the past two years - in fact since the injection of capital in March 1999", Moody's said. "Separating the banks' performance from the equity market is a very difficult process", Moody's said "even though it is acknowledged by both bankers and regulators as critical to the future of the sector".
Moody's also believes that the current situation highlights the shaky foundation of the regulator-dictated "earn out" strategy. "This strategy was the major pillar of all management improvement plans (MIPs) which the banks submitted in order to receive the 1999 capital injections", Moody's said, "but the MIPs have mutually conflicting objectives".
"Moody's believes that eventually the regulators will become more involved in the strategic management of banks". "Clearly, MIPs will have to be reassessed as to their priorities", Moody's added.
However, Moody's says that the stability of Moody's investment grade deposit ratings for E/E+ rated Japanese banks ought to be maintained. "Given our strong expectation of regulatory support, we anticipate stability of ratings over the short-term", Moody's said.
"Going forward, however, we might have to reconsider the banks' investment grade deposit ratings", Moody's cautioned. "Any material rating event, such as changes in regulatory policies or a drop in capital ratios below the minimum levels, would prompt us to reconsider", Moody's added.