3. Resolving the non-performing loan issue under challenging business conditions

For the first two years after the merger in fiscal years 2001 and 2002 (ended March 2002 and March 2003), SMBC posted more than one trillion yen in banking profit for each year, owing to successful efforts to increase earning capacity and cost efficiency. However, this achievement was more than offset by increased credit costs (the total amount of costs related to writing off loans, especially disposition of non-performing loans, and the provision for a general reserve for possible loan losses) and losses due to a decline in stock prices, resulting in sizable net losses for two consecutive years. This, in turn, brought about a consolidated net loss posted by SMFG for the fiscal year 2002 in the first earnings report of the company launched in December 2002. In August 2003, SMFG received an order for business improvement from the Financial Services Agency due to the business results, which fell notably short of the targets that had been set pursuant to a plan aiming to strengthen the business base, and whose results were gauged by measuring profits.

In the fiscal year 2003, SMBC reported banking profit of over one trillion yen, which more than offset credit costs of 803.4 billion yen to achieve 301.1 billion yen in net income, allowing the business to attain profitability for the first time after its establishment. In the following fiscal year 2004, however, both SMBC (non-consolidated) and SMFG (consolidated) posted net losses, returning to unprofitability, due to banking profit declining to less than one trillion yen, partly reflecting a reactionary fall in income from the Treasury Unit and 954.8 billion yen of credit costs. This resulted in SMFG receiving a second order for business improvement from the Financial Services Agency.