Regional banks nationwide fell into deeper financial difficulty in their fiscal first half due to prolonged low interest rates and higher credit costs.

Excluding Suruga Bank, which was hit by a lending scandal, 66 of the 102 regional banks reported lower net profits for the six months ended in September, and five posted losses.

The 102 banks’ combined net profit fell 13.8 percent year on year to ¥435.5 billion (about $4 billion) as their credit costs — the amount set aside against potential loan losses — doubled to ¥106.7 billion.

Including Suruga, the 103 regional banks’ net interest income dropped 4.1 percent to ¥1.788.2 trillion as the central bank’s monetary easing cut into lending margins.

Their net profit from core banking operations grew 6.8 percent to ¥652.3 billion thanks to gains from bond sales.

Still, Chiba Kogyo Bank President Hitoshi Umeda said: “Loans are the main source of income. The situation is tough.”

First-half total credit costs exceeded ¥100 billion for the first time in seven years.

The high credit costs came as a result of risk management by individual banks, said Ritsuo Sasajima, chairman of the Regional Banks Association of Japan. “Banks don’t necessarily set aside provisions because of a weak economy,” he said.

But industry sources said moves by regional banks to lend to clients outside their home regions have increasingly led to loose risk control.

“There is concern about growth in credit costs in the second half in the aftermath of natural disasters,” said Yusuke Yasuoka, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co.

Suruga swung back to a net profit of ¥15.9 billion in the first half from a loss of over ¥100 billion in the same period a year before.

Including Suruga, the 103 banks’ combined net profit rose 11.0 percent to ¥451.1 billion.

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