2ND LD: Japan's big banks post losses on bad-loan disposals.

TOKYO, May 26 Kyodo

(EDS: MORE INFO IN LAST 5 PARAS)

Japan's seven major banking groups on Monday reported net losses for the year ended March 31 for the second straight year due to aggressive bad-loan disposals and hefty valuation losses on their shareholdings amid deflation and tumbles in stock prices.

The results underscored the vulnerability of the nation's banking system, especially when financial markets are growing nervous about the impact of the state's plan to bail out Resona Bank under Resona Holdings Inc., Japan's fifth-largest banking group by assets.

The major banks chalked up a combined group net loss of 4.62 trillion yen, up from 4.07 trillion yen a year earlier, with Mizuho Financial Group Inc. accounting for half with 2.38 trillion yen, the biggest net loss by a listed company in Japan.

The banks are the four megabanks -- Mizuho, Sumitomo Mitsui Financial Group Inc. (SMFG), Mitsubishi Tokyo Financial Group Inc. (MTFG) and UFJ Holdings Inc. -- as well as Resona Holdings, Mitsui Trust Holdings Inc. and Sumitomo Trust & Banking Co.

The seven lenders booked a total of 5 trillion yen in disposing of dud loans for the reporting year, sending the combined outstanding balance of their bad loans under government rules as of March 31 to 20.80 trillion yen, down from a record 26.78 trillion yen the previous year.

The banks said they have overcome the toughest stage in tackling the bad-loan problem, with MTFG President Shigemitsu Miki saying he ''now clearly sees the end to the problem'' while SMFG President Yoshifumi Nishikawa said his group will try to ''halve the amount of soured loans in two years.''

The seven banks also posted stock-related losses worth more than 3 trillion yen as Tokyo share prices slumped to 20-year lows. They said they have accelerated unloading heavy shareholdings to shield them from sharp falls in share prices.

''We're now quite resistant to fluctuations in stock prices after selling stocks worth 1.44 trillion yen last fiscal year,'' UFJ Holdings President Takeshi Sugihara said.

''Our capital adequacy ratio won't decline below the 8% minimum capital adequacy requirement for banks operating internationally unless the Nikkei Stock Average moves down to the 5,000 line,'' he said.

Also weighing down the lenders was a stricter calculation of deferred tax assets counted as capital, a key factor that drove Resona Bank and its parent to fall below the 4% minimum capital adequacy ratio required for banks operating domestically.

Of the seven, Resona is the only banking group operating exclusively in the country.

All the seven except Resona and Mitsui Trust surpassed as of the end of March the 8% threshold stipulated by the Bank for International Settlements, with MTFG marking the highest at 10.84%.

Mitsui Trust also cited stricter auditing in its core capital called Tier 1 for the fall of its capital adequacy ratio below 8%, saying it shed 45 billion yen of its deferred tax assets.

In Japan, when banks dispose of bad loans, the loan-loss provisions they set aside are taxed, but the tax payments are effectively returned as they are deducted from those on taxable income when a borrower fails and the loss is fixed.

Under deferred tax accounting, tax payments on loan-loss reserves can be booked as tax assets and counted toward a bank's capital. But many credit analysts believe that treating these assets as bank capital is a dubious practice because the tax payments in question will not be returned unless a bank makes profits.

Looking ahead, all the banks except Resona expect to swing back into the black for the current year to March 2004. Resona did not give an earnings projection for the year because it has not yet drawn up a business reconstruction plan to be submitted upon application of a state bailout later this month.

Some banks, such as Mitsui Trust and UFJ, said they will consider ways to bolster their capital bases to better cope with possible contingencies as persistent deflation undermines economic recovery.

Despite acceleration of bad loan disposals and of selling of equity holdings by the banks, analysts are skeptical about their upbeat projections for the current year, saying they must present sound business models to boost profitability.

''Banks, for example, need to boost efficiency through such measures as restructuring and outsourcing of their businesses in order to realize those projections,'' said Hideyasu Ban, banking analyst at Morgan Stanley Japan Ltd.

''Of course, such efforts should be accompanied by the government's policy to stem deflation,'' he added.

Ban, in the wake of the Resona problem, also said that some banks are still too dependent on deferred tax assets, and that investors are paying attention to whether banks and auditors reasonably forecast banks' future income and calculate tax credits.

''It is important for banks to enhance the quality of their capital bases,'' he said.