Fitch Ratings has said, in a new comment to be published shortly, that the annual results to end-March 2009 (FYE09) of Japan's three "mega" banking groups - Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group (Mizuho), and Sumitomo Mitsui Financial Group - were the worst since FYE03 when Japan was mired in its own home-grown financial crisis.

All three mega bank groups posted net losses in FYE09 for the first time since FYE03, mainly due to an increase in loan loss charges and stock investment losses. Furthermore, in addition to the net losses, the unrealised gains on securities investments reverted to unrealised losses in FYE09 due to a drop in stock prices, and placed pressure on the mega banks' capital, both in quality and quantity, despite their new issuance of capital during FYE09.

Fitch, however, also notes a significant difference in FYE09 results from FYE03 results, notably that the deterioration of the mega banks' asset quality remains modest to date. Fitch considers the significant difference is a result of an improvement in the mega banks' credit risk management following the previous crisis.

All the mega banks forecast a return to net profit in FYE10, mainly due to an expected absence of impairment losses on stock investments as well as lower loan loss charges compared to FYE09 (with the exception of MUFG). Although Fitch does not expect the losses on stock investments of the same magnitude as FYE09, it notes that loan loss charges could rise further in FYE10 in line with the still high level of corporate bankruptcies as well as weak economic recovery prospects. Given the potential for lower pre-provisioning operating profits and higher loan loss charges than the banks forecast, the agency does not rule out the possibility that some of the mega banks may report a net loss again in FYE10, despite the banks' own forecasts of net income for FYE10.