Regional banks brace for mortgage defaults

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Smaller regional banks may need to brace for an increase in mortgage defaults as unemployment rises and the contagion from the recession spreads.

“Banks need to take steps to prevent loans to individuals from going bad, just as they do with corporate borrowers,” said Nobuo Kojima, chairman of the Second Association of Regional Banks, which represents 44 lenders. “We’ve seen a lot of measures to support smaller companies, such as credit guarantees, but nothing much for individuals.”

The nation’s smaller regional lenders grant a third of their loans to individuals and face the risk of homeowners defaulting on debt after corporate bankruptcies forced more than half of the 44 banks in Kojima’s association to book losses in the year that ended March 31. Defaults by individuals may crimp the banks’ earnings, Masahiko Sato, an analyst at Nomura Holdings Inc. in Tokyo, said Tuesday.

The unemployment rate rose to a five-year high in May, the government said June 30, as firms cut jobs and bonuses amid a slump in exports. Wages fell for a 12th consecutive month, the labor ministry said. Summer bonuses at the largest companies will drop a record 18.3 percent this year, according to a survey published in June by the Japan Business Federation (Nippon Keidanren), the country’s biggest business lobby.

Mortgage borrowers at banks including Mitsubishi UFJ Financial Group Inc., Japan’s largest, can pay as much as half of their annual loan installments in two lump payments, timed to coincide with summer and winter bonuses. Mitsubishi UFJ had ¥17.4 trillion in outstanding housing loans at the end of March, or 21 percent of its total loans, compared with 24 percent at Sumitomo Mitsui Financial Group Inc. and 15 percent at Mizuho Financial Group Inc.

Keiyo Bank Ltd., of which Kojima, 62, is president, set up a team in February to deal with mortgage borrowers who were at higher risk of falling into arrears, he said. The lender, which had total assets of ¥3.3 trillion as of March 31 and is based in Chiba Prefecture, has yet to see a spike in mortgage defaults, Kojima said.

Keiyo Bank registered a 6 percent decline in bonus payments into its customers’ accounts in June from a year earlier, Kojima said. The bank plans to contact 100 home borrowers this week to check on loan repayments, after consulting with about 90 between February and June, he said.

“Mortgage lending is actually decelerating, but individual financial institutions are still aggressively offering them,” Michio Kitahara, associate director general of the Bank of Japan’s surveillance department, said at a Wednesday briefing in Tokyo. “At the margin, there are signs that some mortgages are going bad.”

More than half of Japan’s listed regional banks posted shortfalls because of soured investments and rising bad loans last year. The effect of reductions in personnel and inventory at larger firms has yet to fully spread to smaller firms, Kojima said.

Smaller regional banks set aside ¥289.8 billion in reserves last year, more than double the figure for the previous year, as corporate bankruptcies reached a six-year high.