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(The following was released by the rating agency)
TOKYO (Standard & Poor's) Nov. 22, 2012--Japan's 15 rated regional banks saw their net income decline in the first half of fiscal 2012 (April 1 to Sept. 30, 2012), despite firm revenues. At the same time, their net interest margins are narrowing, Standard & Poor's Ratings Services said in a Japanese-language report published today. The 15 regional banks booked a 7% year-on-year decline in before-tax net income in the first half, which is within our expectations. (Figures are the total amounts of the 15 banks; percentages are weighted averages unless otherwise noted.) Losses from equity holdings, declining interest income caused by shrinking margins, and increased credit costs pushed down net income at the regional banks. Although there was an increase in profit from selling their bond holdings (mainly Japanese government bonds) and a decrease in expenses, they could offset only about one-third of the total losses caused by the aforementioned factors. Core net operating profits, which exclude nonrecurring profit on the sale of bonds, fell 4% year on year.
Overall, the rated regional banks secured firm revenues despite large losses from markdowns on their equity holdings. Although the banks accumulated loan loss provisions in anticipation of the scheduled expiration of the Small and Midsize Enterprises Financing Facilitation Act, and one of them saw a large-scale corporate bankruptcy in its home market, all of them kept their return on asset (ROA) ratios almost in line with those of Japan's five major banks. Nevertheless, net interest margin (NIM), a pillar of interest income that accounts for 78% of the banks' gross operating income, is narrowing at a faster pace than that of major banks. A decline in profitability due to shrinking NIM means the banks are less capable of absorbing losses. Based on this, if NIM keeps shrinking and if we see signs to suggest that their core net operating profits are highly unlikely to be sufficient to cover an average amount of credit costs in an ordinary economic cycle, we may consider lowering the stand-alone credit profiles of the rated regional banks, taking into consideration each bank's financial profile.
The 15 Japanese regional banks are 77 Bank Ltd., Bank of Iwate Ltd., Bank of Kyoto Ltd., Bank of Yokohama Ltd., Chiba Bank Ltd., Hachijuni Bank Ltd., Higo Bank Ltd., Hokkoku Bank Ltd., Hokuriku Bank Ltd., Hyakugo Bank Ltd., Iyo Bank Ltd., Kagoshima Bank Ltd., Keiyo Bank Ltd., Shizuoka Bank Ltd., and Toho Bank Ltd. We used the consolidated figures of Hokuhoku Financial Group Inc. for Hokuriku Bank.