Financial Conditions of Regional Banks: Lending Capabilities to Be Tested in ‘World with Interest Rates’

The economy, which had been stagnant as a result of the COVID-19 pandemic, has been improving, and the financial conditions of regional banks are getting better. In the wake of the return of “a world with interest rates,” regional banks should hone their lending capabilities in their core businesses to support the local economy.

The earnings for the fiscal year ending March 31, 2024, of 90 listed regional banks have been compiled, and total final profits increased 8.9% from the previous year to ¥888.5 billion. Nearly 70% of the banks have reportedly secured an increase in profits.

Sendai-based 77 Bank posted record profits for the third consecutive year. San-in Godo Bank, based in Matsue, also posted its highest profit with increased lending to corporations. With demand for funds increasing, many regional banks expect to increase profits in the fiscal year ending March 31, 2025, as well.

In regional areas, labor shortages are particularly severe due to the low birth rate and aging population, and demand is high for capital investment to promote automation and labor-saving measures. In the tourism industry, the number of inbound visitors to Japan has nearly fully recovered, and the improvement of the restaurant and accommodation sectors’ business performance is becoming clearer.

Regional banks play a vital role in supporting the local economy. They should respond to the needs of customers who require loans to give a solid boost for their businesses.

The question going forward will be how to enhance their lending capabilities in the world of interest rates.

The era of ultralow interest rates has lasted for a long time due to the Bank of Japan’s massive monetary easing policy introduced in the spring of 2013.

Regional banks have found it difficult to make a profit from interest margins from loans — their core business — and have focused their efforts on fund management in investing in foreign bonds, which can offer high yields, and on increasing earnings from commissions from sales of investment trusts.

However, interest rates have risen markedly since the central bank ended its unprecedented monetary easing policy in March. The long-term interest rate temporarily hit 1.1% on Thursday, the highest level in about 13 years.

Regional banks will likely move to raise lending rates. In doing so, it is important for them to grow together with their borrowers by, for example, giving advice about new businesses to client companies and counseling microenterprises on succession issues.

In rural areas, consideration should also be given to the fact that the performance of small and midsize companies is still in the middle of recovery. Many small and midsize businesses, as well as microenterprises, are struggling with inflation and labor shortages, and there was a high number of bankruptcies nationwide in fiscal 2023. Regional banks should carefully consider the circumstances of their borrowers.

In light of increases in interest rates, risk management will take on greater weight.

Bond prices have fallen along with a rise in interest rates in the United States and Europe, and latent losses in bonds compared to the price at the time of purchase have ballooned. Some regional banks, such as Kirayaka Bank based in Yamagata City, fell into the red as a result of bond-related losses.

Overall, latent losses on bonds and other assets at regional banks for the fiscal year ending in March decreased by more than 10% from the previous year but remained high, totaling about ¥1.6 trillion. It is important for regional banks to thoroughly control risks.

(From The Yomiuri Shimbun, June 1, 2024)