Indonesian unrest pushes Japanese banks to raise loss reserves

Indonesian unrest pushes Japanese banks to raise loss reserves

TOKYO (Reuters): Top Japanese banks slow to respond despite their large exposure to companies in Indonesia will now have to speed up precautionary steps, analysts said yesterday.

Concern over social unrest and possible political instability in Indonesia will force Japanese banks with exposure totaling about $23 billion to consider sharply increasing their loan loss reserves, they said.

"As a matter of course, Japanese banks must step up covering possible losses on loans to Indonesia," said Yushiro Ikuyo, a financial analyst at Commerz Securities Japan.

Moody's Investors Service said in a report on Monday: "The Indonesian situation is highly volatile, and its financial system is essentially paralyzed right now... Losses on loans to Indonesian corporations could be particularly high."

Japan's six top commercial banks posted loan loss charges ranging from 20 billion yen ($148 million) to 50 billion yen ($370 million) for loans provided to three Asian nations hit hardest by currency turmoil in the fiscal year ended March 31, analysts said.

They argued, however, that loan loss reserves set aside by Tokyo's big banks represent a small fraction of the loans, with one analyst citing 1.8 trillion yen in loans to companies in Indonesia held by Japan's top six commercial banks.

Some 60 to 70 percent of the loans are to non-Japanese firms.

"They (the big banks) are considering a loan loss reserve ratio of 15 percent on loans to non-Japanese firms there," the analyst said.

Moody's said it is more pessimistic than Japanese banks about losses on loans to East Asian borrowers.

The credit-rating company said it generally agreed that losses on loans to Japanese clients in the region would be lower than on loans to East and Southeast Asian borrowers but warned some Japanese firms also could default.

It cited Japanese cement maker Daido Cement, which declared bankruptcy in March after the parent company could not cover guarantees it extended to failed affiliates in Indonesia.

Analysts expressed concern about the slow response to exposure to East and Southeast Asian borrowers by Japanese banks, noting the banks are already under pressure from bad loans at home.

Analysts said Japanese banks' exposure to East and Southeast Asia of more than 30 trillion yen far exceeds that of other banks, but the banks have only covered a few percent of their exposure to the region so far.

Major Western banks have boosted their loan loss reserve ratio of exposure to Asian countries other than Japan to between 12 and 20 percent recently, they said.

Japan's economic daily Nihon Keizai Shimbun reported on Tuesday that Bank of Tokyo-Mitsubishi (BTM) set aside about 30 billion yen of loss reserves on its exposure to Indonesian companies in 1997/98.

A spokesman said BTM could not confirm the report but said the bank's loans to Indonesian companies totaled $3.18 billion on a group basis at the end of last September, of which about half were provided to Japanese affiliates.

Commerz Securities' Ikuyo said that BTM set aside an estimated 50 billion yen of loan loss reserves to cover East and Southeast Asian borrowers in 1997/98, or less than two percent of its exposure to the region which totaled about 3.32 trillion yen.

The newspaper said Sumitomo Bank posted 30 billion yen in loss charges on loans to Indonesian companies in the fiscal year ended March 31, while Sakura Bank set aside 20 billion to 30 billion yen.