Japan’s Regional Banks Search for Earnings outside of Lending

The Yomiuri Shimbun

12:25 JST, December 30, 2020

Regional banks are now under increasing pressure to reorganize under the initiative of the government. Due to a prolonged period of ultralow interest rates and a declining and aging population, banks’ earning power has been falling. On top of this, with the continued spread of infections of the novel coronavirus, the strength of loan-borrowing corporate clients is also waning.

Although regional banks have long supported local economies, they are at a crossroads in various parts of the country. This is the first installment of a series looking at how regional banks struggle for survival.

■ Promoting local business

Kingo Tatsuno, who designed the Tokyo Station building and the main building of the Bank of Japan in Chuo Ward, Tokyo, is known as the father of modern Japanese architecture. In Morioka, there also stands a red-brick building designed by Tatsuno that is designated as an important cultural property. On Dec. 18 and 19, a Christmas market was held in that building attended by about 1,500 people. The event was organized by locally based trading company manorda Iwate Co., wholly owned by the Bank of Iwate.

Among the items displayed at the market were the region’s traditional cast iron wares called Nambu tekki along with candles and scarves manufactured by local companies.

“First, we have to help local companies in our prefecture prosper,” said Sachio Taguchi, president of the Bank of Iwate. “If regional strength declines, our bank cannot survive either.”

With the population declining, local economies have become ever more run down, thus these banks’ operating environment will also become harsher.

According to an estimate by the National Institute of Population and Social Security Research, the population of Iwate Prefecture will be about 890,000 in 2045, down roughly 30% from now. With 43% of its population expected to be 65 and older by then, the prefecture’s fortunes will dwindle to nothing if no measures are taken.

■ Hit by ultralow rates

Central government ministries and agencies, the Bank of Japan and megabanks have difficulty clearly seeing the situation in regional areas, so regional banks assume a pivotal role in their communities.

Regional banks do not merely lend money. They have nearly single-handedly undertaken roles such as analyzing trends of local economies, promoting local industries and fostering human resources. Their employees are treated as the elite in their communities.

These days, the status of regional banks has been shaken as they have become unable to earn as much revenue as they once did.

The combined net profit of the nation’s regional banks have declined 40% over the past four years.

In the wake of the ultralow interest rate policy taken by the Bank of Japan, the interest rate spread — the difference between the interest rate a bank pays to depositors and the interest rate it receives from loans to consumers — has continued to contract. According to the Japanese Bankers Association, the rate spread for Japanese banks including megabanks fell to 0.2% in fiscal 2019 from around 0.5% a decade ago. Thus, even if a ¥100 million loan is extended, a bank can earn only ¥200,000 a year from that loan.

It has also been pointed out that many regional banks have fallen into a state of “excessive competition” in which they lower their lending rates on their own initiative because they want to attract borrowers.

“The situation is extremely bad in Sendai, which has many excellent companies,” said an official at a regional bank in the Tohoku region. “There are even such cases in which a regional bank offers to its borrowers a lending rate that is close to 0%” just to take business away from main banks.

■ 500 avocados harvested

To break the deadlock, regional banks have been hastily trying to diversify their revenue streams.

Miyazaki Bank has sent its employees to Yumeai Farm, an agricultural corporation it established in August 2017. The farm aims to make the most of the mild climate of Miyazaki Prefecture and grow new local specialties. The plants they deal with are varied, such as lemon trees, coffee plants and avocado trees. In autumn 2019, the corporation harvested 500 avocados for the first time.

Agriculture is one of the mainstay industries of Miyazaki Prefecture, but the sector faces an aging population and a shortage of successors. Miyazaki Bank conducts research such as on cultivation methods that can be shared among many farmers. If the corporation can increase the number of farmers this way, it can unearth new demand for financing.

Hyakujushi Bank in Kagawa Prefecture on Dec. 15 formed a business tie-up with freee K.K., a Tokyo-based company that deals with corporate accounting automation software.

The bank has about 10,000 corporate clients in the prefecture, 75% of which are small businesses with 15 or fewer workers. By joining hands with freee, the bank is embarking on a consulting business for these corporate clients. While receiving commensurate fees, the bank will extend its support to its corporate clients to improve their productivity.

“We have been extending loans and selling financial products to the present day,” said Ryuji Nishikawa, a senior managing executive officer of the bank. “But from now on, we will offer solutions for the challenges our clients face.”

It’s not easy to nurture a new line of business into a primary revenue source, however.

“Haphazardly having a hand in some undertaking is meaningless unless it makes a profit,” said Hayanari Uchino, principal researcher at Daiwa Institute of Research. “What’s important for a regional bank is to make sure of its strong points and figure out what sorts of roles it can play, then enter a new field.”