Some of Japan's regional banks may be forced to consolidate to survive, a consideration many have long been resistant to, as more banks are no longer earning sufficient income to cover operating expenses.
Among 34 Japanese regional banks that reported revenue and expenses data for the three months ended Dec. 31, 2020, four had their quarterly expenses exceed net interest income, according to S&P Global Market Intelligence. Sixteen other lenders reported net interest income-to-operating expense ratios of 1.20 or lower, indicating limited income buffers against elevated expenses. Only one regional bank — The Kiyo Bank Ltd. — reported a ratio above 2, meaning its net interest income was more than double its operating expenses for that quarter.
"They [regional banks] are standing on the brink of an abyss," Shingo Ide, chief equity strategist at NLI Research Institute, said. "Their revenue will remain under pressure from the low interest rates, while their costs could hardly be cut."
In Japan, regional banks' profits have been squeezed by weak credit demand, prolonged ultralow interest rates and high cost bases for years. However, due to cultural reasons such as the corporate norm of lifetime employment, many banks are not able to conduct sizable layoffs. Another local norm of maintaining dividends for shareholders remains a burden on banks' finances.
Limited income buffers
More regional lenders will find their net interest income — the difference between interest they earn and what they pay on deposits and borrowings — insufficient in covering their operating expenses over the next few years, according to Toyoki Sameshima, senior analyst at SBI Securities Co.
Apart from net interest income and operational expenses, other profit and cost metrics for Japanese regional banks also indicate thinning buffers against risks, Sameshima said. Loan-loss provisions at around 80 regional lenders, for instance, surged to ¥155 billion combined, from ¥15 billion four years ago, he added.
Ide said mergers "could be the only option" as consolidation often provides a stronger justification for regional banks to implement bolder cost-cutting measures.
Japanese Prime Minister Yoshihide Suga also said last year there were "too many" regional banks and consolidation could be "one option" for them to improve their operations.
The Bank of Japan said in November 2020 it would pay an additional interest rate of 0.1% on current account balances, on top of the interest rates of between negative 0.1% and 0.1% on deposits, to regional banks and credit unions that decide to merge or integrate with one another and show improvement in financial health such as increased earnings or lower overhead costs.
Analysts have said previously that such a reward could be too little in incentivizing more regional banks to consolidate.
Potential share sale
In addition to thinning buffers, regional banks also face the potential problem of insurers selling some of their stake in the banks to strengthen their own capital positions. A resulting fall in the banks' share prices may limit their capital-raising ability in times of stress.
New requirements for Japanese life insurers to strengthen their capitalization, starting in April 2025, may prompt them to unload regional bank shares and add to the lenders’ troubles.
Nippon Life Insurance Co. and other life insurers, who are major shareholders of regional banks, collectively held ¥541.9 billion worth of shares as of April 5, or 7.4% of the regional banks' total market capitalization, according to Sameshima's analysis. Nippon Life holds shares in approximately 80% of regional banks in the country, a Nippon Life spokesman said.
Japanese media reports in March said Nippon Life was considering selling about 30% of its holding of regional bank shares, worth of about ¥100 billion, in the fiscal year started April 1. A spokesman of Nippon Life denied the reports, saying, "We have no such plans."
As of April 30, US$1 was equivalent to ¥109.31.