Nippon Trust had declared bad debts of pounds 812m, but according to banking analysts the true figure is closer to pounds 3bn. Most of the debts came from loans to property speculators which can no longer be repaid because of a drop in property prices over the past five years. The company is predicting losses of pounds 1bn for the current financial year alone.
Nippon Trust is the smallest of the seven trust banks in Japan, and has had a long-term relationship with the much bigger Mitsubishi for years.
The president of Nippon Trust, Tomoaki Hirano, is a former executive of Mitsubishi, and was transferred to the trust bank in June to oversee the rescue plan.
A Ministry of Finance official said yesterday there was no choice but to rescue Nippon Trust by making it a subsidiary of Mitsubishi. The ministry is calling the bail-out 'a very special case', but banking analysts say the problems afflicting Nippon Trust are spread throughout the industry, restricting banks' ability to make new loans and expand into new business as they frantically try to manage non-performing loans.
Accounting standards are very lax in Japan, and few people outside the Ministry of Finance have reliable figures on the extent of the banks' bad debts. The only bad debts that banks are obliged to report are those on which no interest has been paid for the preceding six months.
This excludes all loans that have been restructured, or troubled loans on which small amounts of interest have been paid to avoid defaulting completely.
For the top 11 city banks, bad loans as reported officially stand at pounds 81bn. But economists say the real figure is far higher: Kenneth Courtis, the senior economist for Deutsche Bank in Tokyo, estimates the city banks alone have bad loans of pounds 400bn.
Nippon Trust, although representing the biggest bank bail-out so far, is still a relatively manageable case for Mitsubishi. The sixth largest of the city banks, Mitsubishi has reported assets of pounds 305bn.
Last year a similar rescue of debt-ridden Cosmo Securities by Daiwa Bank was organised by the Ministry of Finance, which prides itself on never having allowed a Japanese financial institution to go bankrupt.Reuse content