Regional underdog shows Japanese banks how to beat demographics

by Toru Fujioka and Masahiro Hidaka


Critics say Kochi Shinkin Bank has lost its way and is acting more like an investment firm than a regional lender. Supporters say it shows that provincial banks can thrive in Japan even as their customer base shrinks, so long as they’re prepared to adopt new business models.

The bank’s president, Kurumi Yamazaki, steers clear of the wider debate. Sitting in her office at the bank’s headquarters — a modern five-story building sheathed in glass and stone — Yamazaki says she’s focused on maximizing returns for customers. This means maintaining services and offering above-average interest on deposits. With weak loan demand in Kochi, the most remote prefecture on the smallest of Japan’s four main islands, the bank pushed into bond and stock investments to make ends meet.

Japan’s 264 shinkin banks play a similar role to local credit unions in the U.S. and are bearing the brunt of demographic decline. Kochi Shinkin stands out partly because it’s run by a woman, which is a rarity in Japan, and partly because Yamazaki started as a teller fresh out of high school, a career track that’s unusual among bank presidents. But the most notable thing about Kochi Shinkin is its success as the economy around it contracts.

“I’ve let go of wondering and having second thoughts,” Yamazaki, 58, said in an interview earlier this month. “I make a decision and just do it.”

Figures from the bank, the Shinkin Central Bank Research Institute and Teikoku Databank show:

Kochi Shinkin reported net income of ¥25.6 billion ($226 million) last fiscal year, the highest of any shinkin bank.

The bank held ¥577 billion of investment assets on its balance sheet as of March 31, 2016, giving it a ratio of investment assets to deposits of 82 percent, versus about 30 percent for its peers.

Its capital ratio was 47 percent, compared with about 13 percent for banks nationwide.

That’s allowed Kochi Shinkin to pay interest rates as high as 0.2 percent on five-year term deposits. While this may sound low to savers outside Japan, it’s 20 times higher than the 0.01 percent offered by major banks.

The bank began the move into investing under Yamazaki’s predecessor, former finance ministry official Masao Yamamoto. She’s carried the torch since 2011 and is mentoring the next crop of potential leaders. Yamamoto, 87, is now chairman and maintains broad oversight of Kochi Shinkin and its staff of about 270.

Yamazaki shuns derivatives and complex financial products, confining herself to the Japanese market, mostly in corporate and government debt, and blue-chip shares. The bank’s latest annual report shows that 63 percent of investments were in corporate bonds, while 26 percent were in stocks, 8 percent in municipal bonds and 3 percent in government bonds.

Still, some critics have labeled it a hedge fund, while the Japanese monthly magazine Facta published a story in 2014 that said Kochi Shinkin had become a “gambling business” and ought to quit banking.

Katsuhiko Morishita, the president of Bank of Kochi Ltd., a rival commercial lender that’s listed on the Tokyo Stock Exchange, said he’s sticking to lending and won’t be following the shinkin’s path. His bank reported a profit of ¥3.6 billion last fiscal year, a decline of 31 percent.

“The reality is that, instead of lending, many small Japanese banks have to find alternative sources of profits to keep running their businesses,” said Takashi Miura, an analyst of Japan’s banking sector at Credit Suisse. “I have no doubt we will see more small banks like Kochi Shinkin, even (if) the degree of dependence on investment differs.”

While Yamazaki declined to provide specific details of the bank’s holding, Bloomberg data show it is a large shareholder of companies including Kyushu Electric Power Co., Tohoku Electric Power Co. and refiner TonenGeneral Sekiyu KK.

“I don’t think this shinkin is going into a wrong direction,” Akira Otani, the Bank of Japan’s branch manager in Kochi, said in an interview. Otani rejected the description of the bank as a hedge fund and said it had a valid business model.

It’s survived while a third of its peers have disappeared since 1998, according to a report by the Shinkin Central Bank Research Institute.

The number of borrowers in Japan, corporate and individual, has dropped every year over the same period, data from the research institute show.

Testament to Kochi Shinkin’s health, or another sign for critics that it’s off track, is its spacious lobby — adorned with a grand piano and an art collection that includes a sculpture by Pierre-Auguste Renoir.

Yamazaki emphasizes the former, arguing the space is a de facto museum that’s open to the public. That’s in keeping with her view of the bank’s role of serving the community it’s based in and meeting customers’ financial needs.

“A shinkin bank shouldn’t run away,” she said. “It should strive to please everyone in the region.”