Japanese Govt Supporting Mergers of Regional Banks

Yomiuri Shimbun file photo
A ribbon-cutting commemorates the merger creating Juhachi-Shinwa Bank in Nagasaki in October 2020.

The business environment for regional banks is clearly deteriorating due to the declining birthrate and aging population, on top of the years of ultralow interest rates.

In April 2018, the Financial Services Agency’s expert panel released a report on the challenges facing financial institutions in rural areas. The report clearly stated its estimate: “They would be unprofitable in 23 prefectures even if they were integrated into a single regional bank.”

Competition among multiple banks is possible in only 10 of the prefectures: Miyagi, Chiba, Saitama, Kanagawa, Shizuoka, Aichi, Osaka, Hiroshima, Fukuoka and Kagoshima (Tokyo is not included in the calculations). Banks in regions with aging populations — such as Aomori, Akita, Fukui, Shimane and Nagasaki — would find it difficult to survive even if they were consolidated into a single bank.

The report coolly analyzed the environment surrounding regional banks: “The reduction in the number of branches is not keeping pace with the decline in the population in some areas, and in other areas, an excessive number of branches are opening.”

■ Hurrying up reform

More than 2½ years have passed since the release of the report. The administration of Prime Minister Yoshihide Suga, which was inaugurated in September 2020, has leaned into the restructuring of regional banks.

On Nov. 11, Finance Minister Taro Aso and FSA Commissioner Ryozo Himino, among others, met with Suga.

When Aso and Himino proposed an idea to set up a system to subsidize the initial costs of consolidations for regional banks that have decided to integrate their operations, Suga agreed by saying, “Please proceed with the idea as a measure to improve the business environment for regional banks.”

The government will establish a system to subsidize about one-third of the about ¥10 billion initial cost per case.

On Nov. 27, a special measures law inconjunction with the Antimonopoly Law came into effect that allows regional banks to reorganize within the same prefecture even if that would result in the banks holding a larger share of a region’s loans. The special law made it easier for banks based in the same prefecture to reorganize.

The Bank of Japan is following suit. The BOJ has decided to add 0.1% annually to the interest it pays on the money deposited at the central bank by regional banks that work on reorganizing and cutting costs.

Why are the government and the BOJ pushing for the restructuring of regional banks?

In a speech on Dec. 24, Suga expressed his own opinion that “Without the vitality of regions, Japan as a whole will not have vitality.” He then signaled a request to the regional banks as follows: “I want them [regional banks] to support the people in their region. It’s a good thing if unification of two banks strengthen their business foundations.”

■ Cautious attitude

Despite repeated calls for reorganizations, regional banks have been slow to act, with number of relatively large, first-tier regional banks remaining almost unchanged at 63 to 64.

Even after the Suga administration came to power, many top executives of those banks are still cautious about restructuring.

Yamagata Bank President Kichishige Hasegawa said at a press conference in November, “There is no need for a merger, we can go it alone.”

Tottori Bank President Koji Hirai also said, “I don’t feel that there are too many [regional banks].”

Mergers will reduce the absolute number of presidents and executives. The need to keep salaries at the same level seem to be one of the factors for them to be reluctant.

■ Merger relief possible

Even so, there are signs of a change in the thinking of top executives since the outbreak of the novel coronavirus. It is because many of their clients are lodgings, restaurants and other industries that are susceptible to the virus crisis, and their loans to those industries account for more than 20%, according to Okasan Securities Co.’s estimate.

In October, Shizuoka Bank and Yamanashi Chuo Bank, which are regarded as the winning side, announced a comprehensive business alliance that is expected to generate ¥10 billion over five years.

On Dec. 11, Gunma Bank became the 11th member of an alliance of regional banks dubbed the Tsubasa Alliance, lead mainly by Chiba Bank and Chugoku Bank in Okayama, to share the burdens of administration and systems.

In sparsely populated Fukui Prefecture, which faces a low birthrate and an aging population, Fukui Bank is planning to make Fukuho Bank its subsidiary to realize a reorganization among prefectural banks.

Hideto Tago, who is familiar with the management of regional banks and was involved in the preparation of the government’s advisory report, predicts the future of regional banks as follows.

“While business tie-ups between regional banks are likely to progress, there is also a possibility that in the next few years there will be a restructuring of the merger relief [in which regional banks with management capacity absorb those with less capacity.]”