Fitch adds that the unrealised gains of the eight major banks disappear completely when the TOPIX index hits 900 points. At this point, tier-1 capital starts to crumble. As of Thursday, the simple moving average of the TOPIX over the past 50 days was 878 points, and 1,052 points over the past 100 days.
Fitch estimates that the major banks' tier-1 capital would be dragged down to the minimum permissible 4% if the TOPIX slid to 600 points. SMFG's capital raising therefore makes good sense, as does that of its peers. In fact, a total of $30 billion in capital raisings have been announced this year by the Japanese banking sector.
According to the Fitch report, SMFG had a tier-1 capital ratio of 7.08% in September, compared to 7.36% for Mitsubishi UFJ Financial Group and 7.36% for Mizuho. SMFG was the only bank that saw its tier-1 capital adequacy ratio improve somewhat between March and September. SMFG had a total (including tier-2) capital ratio of 10.25% in September, down from 10.56% in March. This is not high by international standards, says Fitch.
The ratings agency welcomes additional capital, whatever the form, but notes that the quality of the mega banks' capital will not be improved by such moves. Indeed, core capital is related to shareholder equity, and is supposed to reflect the concentrated value of the company based on the original shareholders' equity and retained earnings. Using hybrid capital to complement the former shows that net earnings may not be growing at a healthy pace. SMFG's net income of ¥83 billion in the six months to September 2008 was down over 50% on the ¥171 billion it earned in the same period last year.
SMFG and the other banks are not just facing market risk via their dangerous shareholdings, they are also facing credit risk as the Japanese economy slides into recession. Credit costs for the first half of the 2009 financial year (ending March 2009) doubled for the eight major banks. SMFG has the highest net non-performing loans to tier-1 capital ratio among the major banks, at 11.5%. Problem loans appear to have risen as a result of the weakening of the real estate sector, defaults among small businesses, and losses on the exposure to Lehman Brothers, which Fitch computes at about ¥150 billion for the major banks.
SMFG is no doubt regretting the $1 billion it spent on its passive (voting rights are 2%) stake in Barclays PLC in June, whose share price has fallen precipitously in the interim. Its only comfort is that its rival MUFG's $9 billion investment in Morgan Stanley hasn't performed well either.
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