Regional banks in Japan are increasing capital and business tie-ups with each other or with nonbank businesses in a desperate attempt to survive increasingly tough operating conditions.

Such banks are one of the weakest areas of Japan's financial system, as they have continued to struggle with the effects of razor-thin interest rates and a falling population.

"The crunch moment will come for regional finance in the next two years," Finance Minister Taro Aso said in a speech at a New Year party held by the Regional Banks Association of Japan, urging the promotion of reforms in the sector.

The Bank of Japan's negative interest rate policy has made it "extremely difficult" for regional banks to make profits from core operations such as lending, said Katsuichiro Toyoshima, president of Shimizu Bank.

With Japan's graying and dwindling population eating into local economic activity, regional banks are also having a hard time in the face of competition from emerging technology companies entering into the financial sector.

Under the BOJ's negative rate policy, introduced in February 2016, commercial banks pay interest on some of their deposits at the central bank. Resulting falls in long-term interest rates have dealt a serious blow to regional banks. In fiscal 2018, 103 regional and second-tier regional banks logged a total of ¥1.2 trillion in core net business profit, down a sharp 23.2 percent from fiscal 2015.

Alarmed by the slow moves of regional banks to address their worsening earnings, the Financial Services Agency added "future profitability" to its list of key monitoring items last summer with the aim of prodding them to accelerate reforms.

In July, Bank of Yokohama, a unit of Concordia Financial Group Ltd., and Chiba Bank signed a business tie-up agreement, including the establishment of joint branches in Tokyo by the two top regional banks based in the metropolitan area.

Fukui Bank and Fukuho Bank in Fukui Prefecture are discussing a comprehensive alliance, as are Aomori Bank and Michinoku Bank in Aomori Prefecture.

Partnerships between regional banks and nonbank concerns are also increasing. Shimane Bank, Fukushima Bank, Chikuho Bank and Shimizu Bank will accept investment from SBI Holdings Inc. to jointly develop smartphone apps and create a unified computer system under the leadership of the major online financial company. In addition, the SBI-led alliance will reinforce the management of funds.

San-in Godo Bank and Awa Bank have separately teamed up with Nomura Securities Co. to sell financial instruments to individual investors on behalf of Japan's biggest brokerage house. The banks have also commissioned Nomura to manage securities accounts opened by clients to buy financial products.

Until recently, regional banks pursued the integration of management or mergers to expand the scale of operations for the sake of survival. But the consolidation of management and operations takes time and money and can face various problems. "Mergers do not necessarily improve the quality of operations," said Yoshitaka Kitao, president and chief executive officer of SBI.

In contrast, tie-ups can be readily implemented as they establish complementary relations between partners for individual management objectives such as realignments of branches, reassignments of personnel, utilization of technology and improvements in fund management.

Referring to Chikuho Bank's alliance with SBI, Seiichiro Sato, president of the bank, based in Kurume, Fukuoka Prefecture, said a tie-up with a nonbank partner can change business models and is therefore more beneficial than seeking business scale expansion between banks.

For SBI and other nonbank partners, the extensive branch networks of regional banks are attractive.

With attention focused on emerging moves among regional banks to expand their operations while retaining management independence, they are being tested on their primary task of finding promising local businesses and helping them grow through alliances with nonbank partners.

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