Fitch Ratings says that, despite a forecast of return to profitability in the current financial year ending March 2010, major Japanese banks could continue to face pressure on their capitalisation and ratings.

After reporting substantial aggregate losses in the fiscal year ended March 2009 (FY09), positive net income is forecast by all major banks in the current fiscal year, mainly due to an absence of impairment charges on stock investments and a decline in loan loss charges, although this varies bank to bank. However, Fitch does not rule out the possibility of some banks reporting net losses again due to weaker pre-provisioning operating profit and a potential further increase in loan loss charges.

With profitability remaining weak in the best case scenario and potential risks stemming from still large stock investments and a possible worsening of asset quality, Fitch believes major Japanese banks' capitalisation and, in turn, their ratings will remain under pressure in the fiscal year ending March 2010 (FY10). In Fitch's opinion, capitalisation is likely to remain the fundamental issue for most major Japanese banks not only in the current financial year but beyond, until profitability picks up.

In a special report, Fitch says that capitalisation was put under pressure by net losses as well as valuation losses on their securities investments in FYE09. Six of the eight largest Japanese banking groups together posted their largest net losses since FYE03 in FYE09 due to an increase in loan loss charges and large impairment charges on stock investments. The banks also reported JPY1.7trn of unrealised losses on securities investments in FY09, compared to JPY2.7trn of unrealised gains in the previous year. Consequently, the aggregate Tier 1 capital of the major Japanese banks declined 11% y-o-y, despite capital-raising by some banks.