Hiroshi Iwama and Mitsunori Watanabe used to joke about merging their banks in central Japan. When the Bank of Japan introduced negative interest rates last year, things got serious.
The two golfing buddies run Mie Bank Ltd. and Daisan Bank Ltd., two of Japan’s roughly 100 regional lenders. For years, these banks dotted around the nation have faced headwinds as rural areas emptied and aged. With the monetary-policy shift, their plight became acute.
“It changed from being something we might have to think about someday to something we had to think about now,” Daisan President Iwama, 62, said in an interview. Daisan and Mie, led by Watanabe, also 62, announced plans to merge in February.
With the pressure showing few signs of easing, more banking executives are coming to the same conclusion. Consultancy Bain & Co. estimates that about half of the nation’s lenders will disappear by around 2025 as they face a stark choice: merge or close.
Despite the existential threat, many banks remain resistant to teaming up due to long-standing rivalries and different corporate identities.
Regional banks are “highly proud” institutions, and “many of them wouldn’t even be able to change their names,” Hirofumi Gomi, a former chief of the Financial Services Agency, said in an interview. “It’s hard to imagine a wave of mergers and reorganization given the history of regional banks to date.”
The introduction of negative rates has crushed banks’ lending profitability, in a further blow to the financial ecosystem in rural areas that has been strained by more than two decades of economic stagnation and population flight to large cities. Unlike so-called mega-banks like Mitsubishi UFJ Financial Group Inc., regional lenders do not have the global reach or financial muscle to escape the pressures by expanding overseas.
Combined profit at Japan’s 82 listed regional banks fell 11 percent in the year ended March 31, and is likely to drop another 17 percent this fiscal year, SMBC Nikko Securities Inc. analysts estimated in May. Banks that can’t find a way to cope with muted loan demand and razor-thin lending margins “face extinction,” according to S&P Global Ratings analyst Ryoji Yoshizawa.
“The profitability situation for regional banks is very severe,” said Yoshizawa, who has worked in Japan’s banking industry for 30 years. While large lenders have made certain progress after merging years ago and redeploying staff, “it’s clear that regional banks need to do more,” he said.
There are glimmers of hope. Regional lenders have struck 21 mergers or alliances since 2003, and the pace is gradually picking up, according to Daiwa Institute of Research. Three deals have been announced this year as banks seek to boost their loan books, eliminate competition and save costs by unifying functions.
But even merging is no panacea. By 2025, banks will need loan assets of at least ¥8 trillion ($70 billion) at their core lending businesses to be profitable, Daiwa Institute estimates. Only a handful of regional banks clear that hurdle, and Mie and Daisan will reach just a third of the threshold after combining.
“What banks do with loan business is basically all the same, so economy of scale is key,” said Hayanari Uchino, a managing director at Daiwa Institute.
Trying to achieve that scale may invite the attention of the competition watchdog. The Fair Trade Commission has been holding up a planned merger by Fukuoka Financial Group Inc. and Eighteenth Bank Ltd. in Kyushu since last year, citing monopoly concerns. SMBC Nikko Securities analysts have described the prospects of completing that deal as “grim.”
Regional banks thrived during the heyday of the nation’s postwar revival as small businesses built factories and household incomes grew. Now, finding borrowers in rural areas is tough because the demographic outlook there is the worst. In Mie, the population is forecast to drop 13 percent by 2035, more than the 9.3 percent decline projected nationwide, according to the National Institute of Population and Social Security Research.
One of Mie Prefecture’s largest employers, food manufacturer Imuraya Group Co., maintains a relatively equal balance in borrowing from MUFG, Daisan and another local bank, Hyakugo Bank Ltd., according to Chairman Takeo Asada. He said Daisan and Mie Bank will complement each other geographically in the north and south of the prefecture and create a stronger institution together.
“Regional banks have rich local information, which can be extremely useful,” Asada said in an interview at the company’s headquarters in Tsu. Daisan recently helped Imuraya, the maker of the much-loved Azuki Bar, a frozen red-bean snack, to find an idled factory to lease, he said.
Daisan and Mie Bank are hoping that their deal will make it easier to get more business in urban areas that have better growth prospects. The new entity will have a network of 34 branches in neighboring Aichi Prefecture, home to manufacturing powerhouses such as Toyota Motor Corp.
“It would take considerable time to open a new branch and bring it into the black in the current interest-rate environment,” Mie Bank’s Watanabe said. “From that perspective, we’re buying ourselves some time.”
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