Hong Kong branches of Japanese banks continue to report a slide in local and regional lending. The decline is seen as an inevitable consequence of the banks' desire to cut their costs and increase their profits in the wake of recent turmoil in the Japanese banking sector. Disclosures to the Hong Kong Monetary Authority for the six months to March show continued contractions in loan books - led by a 36 per cent retreat in advances made by Fuji Bank, down to HK$41.75 billion from HK$65.27 billion. Total assets were down by a smaller margin of just 4.8 per cent to HK$156.51 billion from HK$164.53 billion, chiefly due to a 14 per cent increase - to HK$108.9 billion - in loans the Hong Kong branch made to its Tokyo parent. Outstanding advances reported by Sumitomo Bank stood at HK$97.81 billion on March 31 - down 21.3 per cent on their level of HK$124.4 billion as of September 30 last year. Total assets were 15.3 per cent lower to HK$139.4 billion from HK$164.68 billion. During the same six-month period to the end of March, the Bank of Tokyo-Mitsubishi saw advances retreat 15.7 per cent to HK$76.18 billion from HK$90.39 billion. As was the case with Fuji Bank, total assets were down by a lower margin of 6.9 per cent to HK$163.99 billion due to the combined impact of increased loans to its parent and investing in certificates of deposit rather than commercial loans. Sanwa Bank reported a 6.7 per cent decline in its customer advances to HK$265.27 billion from HK$282.74 billion. Assets for the HK branch were not disclosed. Asahi Bank reported advances down to HK$8.11 billion, from HK$8.89 billion, while Tokai Bank's advances were down to HK$56.95 billion from HK$62.27 billion. Still to report are Industrial Bank of Japan (IBJ), Dai-Ichi Kangyo Bank and Sakura Bank. IBJ and Dai-ichi reported sharp declines in the six months to the end of September last year - from HK$169.5 billion to HK$106 billion for Dai-Ichi, and HK$15.52 billion from HK$23.17 billion for IBJ. Faced with crippling loan-loss provisions when Japan's asset price bubble burst, Japanese banks were recapitalised with massive injections of public funds and are in the process of cleaning up their loan books and raising returns in order to repay the public purse. The process has also led to the announcement of several mergers, one of which will create the world's biggest financial services group. Analysts say a contributing factor in lower lending was a November reminder from the Hong Kong Monetary Authority - that it expected banks to make a general provision against prospective loan losses of at least 1 per cent. This additional cost of making loans, said analysts, effectively slammed the door on a tax advantage previously available to Japanese banks that had booked loans through their Hong Kong branches at margins which were as narrow as 50 basis points above cost of funds. However, the HKMA said it disagreed its reminder played any role in the continued decline of Japanese lending. 'We think this is incorrect,' said an official. 'This provision has been in place for many years and should not have had any effects on loan activity - moreover, it is an international prudential standard.' The official would not comment on individual bank performance, but emphasised that all banks in Hong Kong - including Japanese banks - were adequately capitalised. 'The cause for the lower lending might perhaps be that there are not so many lending opportunities in the current economic cycle - it is not because they have inadequate capital,' the official said. Ratings agency Fitch IBCA managing director David Marshall said the data was in line with expectations. 'The continued contraction in the Japanese loan books is not surprising, given the pressure they are under at home to streamline their costs and enhance their profitability,' he said. 'That means focusing on their core business, which - as is normally the case with commercial banks - is their domestic retail market.' Mr Marshall said since the Japanese Government had come to the rescue of the country's banks, it now had a major say in formulating their strategy. 'And banks are now under pressure to repay the capital that was injected by the government to support their capital adequacy ratios.' As a result, the lending focus was more sharply on measuring risk and return, he said.