The Structure of Financial Assets, Income and Expense of Japan’s Banks, and Fundamental Strategies to Enhance Profitability

ABSTRACT

A decrease in company borrowing and an increase in government debt have transformed the structure of financing in Japan in the sense that companies have lowered their dependence on banks while the government relies on them even more. This change has had an extremely large impact on the financial asset structure of banks, and coupled with the progress of banks in the disposal of bad loans, is inviting sluggish growth of bank asset balances and a dramatic shift in the content of assets from loans to securities.

While the profitability of Japan’s banks are in a trend of moderate improvement, the net interest income is decreasing from structurally low spread of interest rates, and increases in non-interest income from other service revenue and so on are unable to cover this decrease. Compared with the income and expense structure of US banks since the latter half of the 90s, while Japan’s banks maintain an edge in the expense ratio, major factors such as the low net interest income, attributed to low spread of interest rates, have put them at an overwhelming disadvantage.

For banks to enhance profitability, they must employ strategies based on income and expense structure differences and the relationship between scale and profitability. In this sense the direction of the basic strategies of city banks and regional banks will naturally differ. Specifically, it is necessary that city banks pursue revenue increases outside of net interest income such as other service revenues, while taking advantage of the merit of scale to lower the non-interest expense ratio is an effective option for regional banks.

Movements such as the expansion of banks’ scope of business from a partial revision of the “Financial Products Trading Law”, which is currently being pushed by the government, as well as mergers being promoted among some regional banks serve to unite the direction and trajectory of the fundamental strategies necessary for enhancing the profitability of these banks. These movements should be advanced even more vigorously in the future.