A bleak forecast by the Bank of Japan that nearly 60 percent of the nation's regional banks will suffer net losses 10 years from now serves to remind us of the tough prospects facing these financial institutions. They will have to overcome a dwindling client base brought on by the accelerating population decline in many regions across Japan and the tightening profitability of their lending business.
The worsening performance of regional banks bodes ill for the companies and other borrowers that sustain regional economies. The BOJ's report cites mergers between struggling banks as an option for their survival, but that alone won't resolve the problems biting into their profitability. Leaders at these banks need to redouble their efforts to explore a new, sustainable model so they can stay open for business.
The financial system report released last month by the central bank warned that growth in the regional banks' outstanding loans will slow down if the business demand for lending continues to fall at the current pace, while the cost of setting aside loan loss reserves in case their lending turns sour will increase. While currently only about 1 percent of all regional banks post net losses, the ratio will increase to 58 percent 10 years from now, the BOJ said. If a financial crisis like the one that followed the 2008 Lehman Brothers collapse were to happen five years from now, the regional banks would sustain greater damage than if such a crisis took place today, because profitability and capital adequacy are expected to decline in coming years, the central bank said.