TOKYO -- It has been 20 years since Japan's financial system collapsed in 1997, following the bankruptcy of Hokkaido Takushoku Bank and the closure of Yamaichi Securities in November that year.
While the scale of nonperforming loans -- the very source of financial instability -- has fallen significantly, Japan's three megabanks Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group still have a long way to go on their path to reform -- and profitability.
Dimming profitability, due to negative interest rates and a lack of structural reforms, is reducing the banks' central role in the economy, keeping them from taking the kind of bold action they once did, such as by waiving the debts of Japan's struggling flagship companies like Toshiba.
After Japan's economic bubble imploded in the early 1990s, banks were saddled with a mountain of nonperforming loans. That led to the collapse of Hokkaido Takushoku and Yamaichi in 1997 and was followed the next year by Long-Term Credit Bank of Japan and Nippon Credit Bank. The government upgraded its unit for industry oversight into what is now the Financial Services Agency.
MUFG is now preparing a medium-term business plan for the three years from April 2018. A draft of the plan, submitted for discussion in August, includes measures to abolish or integrate 86 branches and open a new type of branch on a pilot basis. The numbers caused a stir among those involved in the discussion, some of whom opposed setting a numerical target, while others pushed for deeper cuts. The plan is expected to be finalized by spring.
The other two megabanks are making similar moves. Mizuho plans to close or consolidate 20 to 30 branches over the next three years. Sumitomo Mitsui Banking Corp. hopes to digitize more work at its local branches.
Together, such efforts are expected to put 32,000 employees out of work at the three banks, roughly a third of existing jobs. Jobs at local branches were once considered safe from such downsizing, but bank executives are no longer hesitant to bring down the axe.
After the 1997 financial crisis, the three megabanks reduced the number of domestic branches from 2,200 at the end of March that year to just over 1,500 as of March 2006. The cuts were largely due to the elimination of duplication caused by mergers. The number of branches rose again to 1,662 as of March this year, even though the number of customers visiting branches has fallen 40% in the last 10 years, said Bank of Tokyo-Mitsubishi UFJ President Kanetsugu Mike.
Financial data also indicates the slow pace of the industry's restructuring. Costs are particularly unwieldy. Thanks to overseas expansion, costs have been increasing steadily at Japan's city banks, which include the megabanks and several other major banks. In fiscal 2016, their aggregate costs increased by 5% from the previous year, to 3.26 trillion yen ($28.6 billion), exceeding the 3.24 trillion yen in fiscal 1997 before the reorganization.
By contrast, their combined gross profit, or sales, was slightly above 5 trillion yen in the latest fiscal year, down 20% over the last 15 years, the period for which data are available. Their cost-to-profit ratio now stands at 60%.
Between 2000 and 2005, the industry consolidated under the three megabank groups. The plan was for the three banks to increase scale and become stronger. Their combined deposits grew 50% from 230 trillion yen in fiscal 1997 to 352 trillion yen as of March 2017. Their assets also expanded from 445 trillion yen to 700 trillion yen, and they are all ranked in the top 15 of the world's largest financial institutions.
But the greater scale has not translated into global competitiveness. By market capitalization, the highest-valued Japanese banking group MUFG ranks only 17th globally as of the end of September 2017.
Still, Japanese banks have actively expanded overseas over the last 20 years, buying up companies for large sums in the hopes of making up for the shrinking domestic market.
Such expansion accelerated after the global financial crisis of 2008. Unlike Western rivals hit hard by the crisis, Japanese banks suffered relatively little, picking up the slack in project financing that had been offered by Western institutions, enhancing the international profile of Japanese banks.
Of the three megabanks, MUFG had the highest ratio of overseas operations to overall operations, mainly because one of its precursors, Bank of Tokyo, had been Japan's sole foreign-exchange bank.
In 2008, MUFG extended its global reach further by taking a large stake in Morgan Stanley. It has made several acquisitions since, doubling its net operating profit from global operations to 533.9 billion yen in fiscal 2016, from 256.9 billion in fiscal 2006. Overseas operations now account for around 40% of its overall net operating profit. The company hopes to increase the ratio to nearly 50% in the next three years.
In June, SMBC bought a vehicle leasing business in the U.S. Mizuho Financial Group purchased finance receivables in North America from the Royal Bank of Scotland Group in 2015.
With overseas expansion, however, comes new risks.
"Banks have been too focused on expanding their customer base. They are not making enough non-interest profit," said Ken Takamiya, an analyst at Nomura Securities.