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Japan banks aim for high-tech upgrade

TOKYO: Japan's big banks, finally shaking off a huge bad-loan hangover, are gearing up to boost their spending on high-tech services in an effort to close the gap on their foreign rivals.

But with the bad-debt problem still lingering, it remains to be seen whether the banks can lift their information-technology (IT) spending by as much as planned, or if they will channel the money to the right places, analysts say.

"The bad-debt problem has subsided to some extent. But it may resurface depending on domestic economic conditions," said Reiko Toritani, a director at international rating agency FitchIBCA. "If that is the case, banks will have to curb their spending, including IT investment."

Japanese banks have fallen far behind their foreign rivals in IT investment over the past decade as they have struggled with the fallout from loans that turned bad after the collapse of an asset price bubble a decade ago.

A major Japanese bank spends an average 50 billion yen ($480 million) annually in the IT area while a top US bank spends more than $1.9 billion, industry officials said.

As a result, Japanese banks have been left behind in specialised financial services such as investment banking, private banking and online/phone banking, all of which require highly sophisticated information technology.

VITAL PART OF BUSINESS

Realising this, major Japanese banks are moving to boost IT spending, and the recent flurry of merger activity will make it easier for them to do so by saving costs and pooling resources.

"IT investment will be a vital part of our business," Tatsuro Ito, president of Asahi Bank Ltd 8322.T said in a recent interview with Reuters.

Asahi will merge with Sanwa Bank Ltd 8320.T and Tokai Bank Ltd 8321.T next year, one of a flurry of recent mergers in the sector as banks try to cut the flab from their operations to cope with tough competition from foreign banks and new upstarts at home.

Banks are facing a growing challenge to their previously cosy business from industry newcomers such as high-tech giant Sony Corp 6758.T and Internet investor Softbank Corp 9984.T, who have ventured into the sector to grab a slice of Japan's fast growing online banking business.

Citibank C.N, one of the few major foreign banks operating in Japan, has shown up some of the traditional players' shortcomings, offering sophisticated personal services like phone banking, foreign currency accounts and 24-hour cash machines.

WHERE TO SPEND IS KEY

Asahi's Ito said the merged bank will spend more than 100 billion yen on information technology annually, with the focus on retail banking services.

The other three top banking groups are also digging deeper for IT investment.

Dai-Ichi Kangyo Bank Ltd 8311.T, Fuji Bank Ltd 8317.T and Industrial Bank of Japan Ltd 8302.T, which will merge under a holding company to form the Mizuho Financial Group, will spend 200 billion yen annually, bank officials said.

The merged bank planned by Sumitomo Bank Ltd 8318.T and Sakura Bank Ltd 8314.T will spend some 150 billion yen a year, the same amount planned by the go-it-alone Bank of Tokyo Mitsubishi Ltd 8315.T.

But the major banks have yet to come up with detailed plans on which IT areas they will spend on.

"Boosting the amount of IT spending in itself will not do. The point is where you spend it," said Hideyasu Ban, analyst at Morgan Stanley Dean Witter.

He said one of the banks' top priorities would be to build up their customer data bases, an essential tool for devising new financial services but which Japanese banks have badly neglected.

"Japanese banks don't have information on most of the demographics that they need... They need to have sensible technology for storing the data," said James Fiorillo, analyst at ING Barings Securities.

Analysts say about 60 to 70 percent of Japanese banks' IT investment has so far gone towards maintaining main computer systems that simply control bank accounts.

But with more sophisticated financial services increasingly in demand, the banks will have to channel more spending into strategic areas, including customer data bases and less costly delivery channels like Internet banking, said Ban of Morgan Stanley.

BAD-DEBT PROBLEM STILL LURKING

One potential obstacle to the banks' IT investment plans is the nagging problem of bad loans, analysts say.

Japanese major banks are expected to have written off three trillion to four trillion yen worth of bad loans in the business year ended on March 31, a big decline from the ten trillion yen written off in the previous business year.

This means the banks' bad-debt burden is easing.

But as of the end of September 1999, the banks still had 26.6 trillion yen of problem loans, 13 trillion of which is covered by loan-loss provisions, leaving 13.6 trillion yen in net problem loans, according to analysts.

"If the domestic economy does not improve fast enough or real estate prices fall further, those problem loans could become worse, cutting into banks' earnings," said Toritani of FitchIBCA.

If that is the case, the banks will have no choice but to slash spending including IT investment, she added. -Reuters