Merger of Aomori banks could serve as template for regional lenders

How can regional banks play a role in supporting their local economies amid shrinking regional populations? Hopefully, they will strengthen their management bases through business reorganization to become a role model in that respect.

Aomori Bank and Michinoku Bank, both of which operate mainly in Aomori Prefecture, have reached a basic agreement to hold talks on the integration of their operations in April 2022. They intend to jointly set up a holding company and put the two banks under its umbrella, after which they aim to merge in 2024. The regional banks in the prefecture will be consolidated into one bank.

The current population of Aomori Prefecture is about 1.22 million, but it is expected to drop to a little more than 800,000 in 2045. An increasing number of companies are said to be closing down due to the aging of their business operators.

Inevitably, demand for funds will dwindle. It is reasonable that the regional banks are aiming not only to avoid excessive competition through realignment but also to streamline their operations by expanding the scale of their business.

In November last year, a special measures law connected to the Antimonopoly Law came into effect. Under the special measures law, regional banks in the same prefecture are allowed to merge even if their post-merger share of outstanding loans in the prefecture reaches a high percentage. To do so, they must meet certain conditions, such as not lowering the quality of services to customers. Aomori Bank and Michinoku Bank are expected to be the first case in which the special measures law will be applied to such a merger.

With the business integration, their combined share of outstanding loans will reportedly exceed 70% in the prefecture. It is important to strengthen regional finance, but it should not create disadvantages for customers.

The Fair Trade Commission and the Financial Services Agency should thoroughly examine whether the planned business integration meets the conditions of the special measures law and keep a close eye on it to prevent harmful effects such as unfairly raising interest rates on loans.

Michinoku Bank has ¥20 billion in public funds that were due to be repaid in October 2024. This also may have been a factor behind the planned business integration.

Fukuho Bank, which is set to become a subsidiary of Fukui Bank in Fukui Prefecture, reportedly will accept a capital increase from Fukui Bank after repaying ¥6 billion in public funds.

Of the public funds injected into regional banks nationwide, a total of more than ¥200 billion has yet to be repaid. In order for regional banks to steadily repay the debts, realignment will become a leading option.

The business environment surrounding regional banks is severe. With interest rates remaining extremely low, it is difficult for them to make money on loan margins alone. Of the 77 regional banks and financial groups listed on the Tokyo Stock Exchange, 33 saw their profits decline in the business year ending in March 2021, while three were in the red.

Loans to small and midsize companies, which have been strapped for cash due to the novel coronavirus pandemic, have been growing. However, they could become nonperforming loans if more bankruptcies occur in the future. The government and the Bank of Japan have devised measures to encourage the reorganization of regional banks. Each regional bank should explore the possibility of utilizing these measures.

Realignment itself is not the goal. Management needs to develop strategies to boost profitability. It is important to improve customer services through such measures as supporting the business development of local companies based on specific regional conditions, as well as providing loans.

— The original Japanese article appeared in The Yomiuri Shimbun on May 20, 2021.