I plan to speak for a few minutes about our assessment of Japanese banks and then say a few words about our views on the rest of Asia.
Asset quality remains poor among Japanese banks, although disclosure of problem loans is improving.
Moreover, reserve coverage remains low for Class 2 assets. The interconnectedness among lenders and borrowers in Japan prevents banks from drastically reducing their exposure to weak, large borrowers, as this may cause hardship for other banks. Earnings are too low to compensate for the high credit costs we expect to occur. While there has been some loan growth as a result of the state capital injection, overall loan demand is weak due to the slow economy and interest rates remain very low. Combined, these factors have put enormous pressure on net interest margins.