Seven bank groups slash 1.4 trillion off deferred tax assets

Japan's seven major banking groups slashed their combined deferred tax assets, a major component of core capital, by 1.4 trillion in closing their books for the six months to Sept. 30, down from 7.8 trillion as of March 31, according to banking industry sources.
Consequently, the deferred assets at Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc., Mitsubishi Tokyo Financial Group Inc., UFJ Holdings Inc., Resona Holdings Inc., Mitsui Trust Holdings Inc. and Sumitomo Trust & Banking Co. dropped to 6.4 trillion.

The latest ratio of DTA to their self-assessed taxable income estimates dropped to 35 percent, below the upper limit of approximately 40 percent that is permitted under the accounting rules of the Japanese Institute of Certified Public Accountants, they said.

The seven stiffened internal accounting standards to compute the sum of DTA in light of intense criticism of what some senior banking regulators describe as excessively large deferred assets in relation to prospective taxable incomes.

Critics have blasted the assets at Japanese banks for being "a capital item of poorer quality" compared with other components of shareholders' equity, such as share capital and retained earnings.

A DTA is a tax receivable that a bank is legally allowed to book on both income statements and balance sheets as part of assets and Tier 1 core capital.

Most deferred tax assets arise from loan-loss provisions a bank puts up against loans to troubled borrowers in a given fiscal year, and which tax authorities refuse to recognize as tax-deductible expenses in the period.

The DTA remains part of the capital until tax authorities recognize the provisions as losses that the bank is lawfully allowed to deduct from taxable income only when the borrowers go bust, thus making it clear the loans are no longer recoverable.

There is usually a large time discrepancy between the fiscal year in which a bank posts a DTA and the year in which it is finally allowed to deduct the provisions from its taxable income and cut tax it pays in the year.

Under the "tax effect" accounting rules of the JICPA, which devised DTA accounting rules in consultation with the Financial Services Agency, the allowable sum of a DTA has been severely limited. The tax effect is realized in the form of tax relief or tax cuts.

The JICPA rules have set the upper limit of a DTA that a bank may count as part of its core capital to a sum equal to approximately 40 percent of five years of the bank's self-assessed taxable income estimates.

Some leading economists have called on tax and banking authorities to relax DTA-related accounting rules on the grounds that cutting DTA amounts would deplete banks' capital bases, thereby aggravating the credit crunch, undermining depositors' confidence in affected banks and causing serious instability in the banking system.

In computing financial results for the April-September period, the seven banking groups estimated their combined taxable income for the next five years at between 18.1 trillion and 18.3 trillion, the sources said.

The seven estimated the combined sum of their operating profit a key criterion on which a bank's taxable income is computed at 22 trillion for the subsequent five-year period. Operating profit is the profit from a bank's core businesses, such as lending and commissions, before loan-loss charges are deducted.

The 22 trillion tally compares with the combined 17.8 trillion operating profit the seven actually earned over the past five years.