After direct prodding from the head of the Financial Services Agency
(FSA) for the more than 100 regional banks to slim down through
mergers or takeovers, the regulator has set up meetings with
regional bank presidents to grill them on their long-term business
The agenda is implicit but clear, bankers and regulators say: show
how you plan to survive over the coming decades as local economies
wither, or look for tie-ups. The FSA's push will likely accelerate a
process, dictated by demographics, that had been expected to take
decades, banking industry insiders say.
Top executives at regional banks have shown no public signs of
moving toward consolidation. They tend to be local heavyweights,
reluctant to share power by merging with other lenders and diluting
their status. "Many bank presidents are thinking it's not going to
happen on their watch," said an executive at one regional bank.
"Regional banks are feeling growing pressure from authorities to
consider consolidation," said Natsuko Ishida, a financial sector
analyst at Moody's Japan. "Bank executives who were thinking about
consolidation in a timeframe like 10 years are now under pressure
for a shorter time span."
FSA Supervisory Bureau chief Kiyoshi Hosomizo told regional bank
executives in mid-February, "In many regions, the decrease in
population is continuing, and as a result, we can expect that
deposits will peak out," according to minutes of the meeting
reviewed by Reuters.
At the meeting, attended by a phalanx of senior FSA officials,
Hosomizo told bankers that regular hearings in March and April will
press them on "how each bank will craft its short-, medium- and
They will be grilled not only on their current business areas, but
also about how the financial sector should be more broadly,
including neighboring areas, the minutes show. This is code for
regional banks to consolidate, said a former top FSA official. The
oblique presentation reflects the regulator's "true feelings versus
what must be said in public".
Those true feelings are already clear enough, as national loan
demand has shrunk 10 percent over the last two decades — with the
hinterlands the hardest hit.
FSA chief Ryutaro Hatanaka told regional bank heads in January, "We
would like you to consider business alliances and mergers as
management issues," according to minutes previously reviewed by
An FSA spokesman declined comment on the agency's plan for smaller
Change, when it comes, could be dramatic.
TOO FEW BORROWERS
Twenty-three Japanese banks melded into today's four major banking
groups over the tumultuous 15 years of post-bubble economic and
financial crisis through 2005. Regional banks, which extend roughly
half of Japan's $4 trillion outstanding bank loans, have largely
been spared the knife so far.
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They are awash with pension savings, but cannot find enough
borrowers. They have set aside more cash than needed for loan losses
and are now able to release some excess reserves, giving them what a
senior executive at a major national bank says will be a two- to
three-year earnings bump.
But that windfall can't long mask the prolonged weakness of regional
banks' core business. While net income has jumped, lending profits
fell 4-5 percent in the six months to September from a year earlier,
as loan demand from companies and individuals remains stubbornly
Regional banks are largely tied to the fortunes of their local
prefectures. Aside from Tokyo, Osaka and a few others, the outlook
for the working-age population — and thus the prospect for loan
demand — is grim. Japan is the fastest-graying industrial power, and
rural populations are ebbing even faster as the dwindling numbers of
young head for the cities and the ranks of the remaining elderly
"As loan interest rates keep falling, some banks are hard-pressed to
convincingly explain how they plan to increase revenues," said a
senior executive at a regional bank near Tokyo.
WRITING ON THE WALL
While regional bank executives may be reluctant, the industry as a
whole can see the writing on the wall.
"Regional bank mergers are necessary because local economies also
need to be integrated into bigger markets," said a senior investment
banker specializing in regional banks.
A potential spark, bankers say, could be the December return to the
stock market of Ashikaga Holdings Co Ltd, <7167.T>, 10 years after
the failed regional bank was nationalized.
A possible poster child for the consolidation drive is Fukuoka
Financial Group Inc <8354.T>, the biggest regional bank by assets.
The group, based on the southwest island of Kyushu, was created by a
merger of lenders in the region and is considered a winner with its
growing loan balances.
The group last week nominated Vice President Takashige Shibato as
president, to be effective in late June. "Merger is one of the
strong strategic options in the future," Shibato said.
(Additional reporting by Sumio Ito and
Emi Emoto; editing by William Mallard and Ian Geoghegan)
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