Regional Banks’ Financial Results: Management Being Tested over Response to Rising Interest Rates

Rising interest rates in Japan and abroad have begun to affect bank operations. For regional banks, they have also become a factor in the deterioration of their business performance. It is hoped that regional banks, which support local economies, will make efforts to stabilize their operations.

According to the financial results of the 89 listed regional banks nationwide for the six-month period ended September 2023, total net profits fell 6.5% from the same period last year to ¥518.1 billion. Forty-eight banks reported a decrease in profits, and two banks were in the red. Only 30 banks reported an increase in profits.

Regional banks have so far increased their investments in foreign bonds, which are expected to offer high yields, in response to investment difficulties and sluggish demand for funds due to low interest rates. They also hold large amounts of domestic bonds, including Japanese government bonds.

Against this backdrop, the U.S. Federal Reserve Board raised interest rates, causing U.S. long-term interest rates to rise. In Japan, too, the Bank of Japan has revised its monetary easing measures, and long-term interest rates are rising.

When interest rates rise, bond prices fall. If the price of bonds falls below the price at which they were acquired, banks will incur unrealized losses on the bonds they hold. Earnings have been reportedly pushed down due to factors such as banks selling their bonds early to dispose of unrealized losses.

Banks’ operations are heavily influenced by interest rate trends. Each regional bank must keep a close watch on global interest rates and minimize associated risks.

Unrealized losses on bonds and investment trusts held by regional banks nationwide totaled nearly ¥3 trillion as of the end of September, up more than 80% from three months earlier.

Some in the financial markets believe the BOJ may lift its negative interest rate policy next year at the earliest. If regional banks continue to hold the bonds, their unrealized losses could increase further.

There are concerns that regional banks’ foundations may deteriorate in such a case, and their surplus ability to provide loans may be impaired. They need to carefully examine their bond holdings to prevent losses from increasing.

On the other hand, higher interest rates will increase interest margins on loans, providing a tailwind for their core businesses. Regional banks have entered a phase to prepare for a full-fledged rise in interest rates.

Japan’s economy is at a turning point to exit deflation and achieve a virtuous cycle of higher wages and growth. However, compared to large companies, small and midsize enterprises are having a tougher time managing their businesses due to higher fuel and raw material costs. Regional banks have a major role to play in supporting small and midsize firms and spreading wage increases to them.

Financial institutions have been helping small and midsize firms with their cash flow through such measures as postponing repayments during the coronavirus pandemic. It will be important from now to focus on business rehabilitation to shift to growth, and the Financial Services Agency said it will revise its supervisory guidelines for financial institutions to include such content in the spring of 2024.

There are many issues that small and midsize companies need to address, such as labor saving, digitization and decarbonization. Regional banks should focus on helping companies resolve these matters.

(From The Yomiuri Shimbun, Dec. 6, 2023)