Japanese regional banks may need to set aside more funds to cover the risk of rising defaults, particularly as bankruptcies increase.
The aggregate nonperforming loan ratio in a sample of 58 Japanese regional banks edged lower to 1.78% in the fiscal year ended March 31, from 1.83% in the previous year, according to S&P Global Market Intelligence data. Analysts and the banks themselves warn that the mounting pressures on the country's firms could impact lenders in the coming quarters.
"Regional banks are likely facing headwinds of loan repayments," said a spokesperson at The Bank Of Kochi Ltd. "The outlook for our [business] conditions is uncertain."
Corporate bankruptcies, many of them among smaller companies, jumped to 760 in August, an increase of more than 50% over the previous year, according to Tokyo Shoko Research data. August marked the 17th consecutive month of higher bankruptcies. Failures in 2023 will likely exceed the previous year's total of 6,428, according to the research firm.
Headwinds ahead
Tough economic conditions are hitting smaller companies especially hard as they battle high inflation, yen-to-dollar deterioration and labor shortages. These challenges could mount as a COVID-era government subsidy program runs its course.
Banks, especially regional lenders that cater to smaller borrowers, are cautious about repayment as their customers are suffering higher material costs. The Japanese yen has declined sharply against the US dollar, and companies face labor scarcity in the aftermath of the pandemic.
"If the economies in China or the US lose ground, or if consumer demand in Japan shrinks on higher import prices, that would further impact smaller [Japanese] companies," said Takahide Kiuchi, executive economist at Nomura Research Institute. "If that is the case, regional banks would need to set aside more money."
Japan's economy is likely to stay weak, even as most analysts expect the central bank to keep its ultraloose monetary policy at least through 2023.
"Hit by high cost of materials and shortage of labor, small and mid-size companies are facing harsh conditions," said Jun Ishida of Japan Asset Management Platform, a consulting firm that advises regional banks. "But because regional banks won't turn their back on those companies, they may have to increase credit cost and shoulder more nonperforming loans," Ishida told Market Intelligence.
Weak outlook
The aggregate net income of the Market Intelligence sample of regional banks was ￥728 billion in the fiscal year ended March, slightly lower than ￥736.88 billion in the previous year, the data shows. The 58 regional lenders under Market Intelligence coverage are among the 62 members of the Regional Banks Association of Japan.
The association said 32 of its 62 members expect lower net income in the year ending March 31, 2024. The aggregate net income of all its members is expected to grow 4.4% to ￥783.6 billion, according to data the association compiled in June.
The Bank of Kochi set aside ￥340 million in credit costs for the April-to-June quarter, dragged by the bankruptcy of a customer, a local diaper maker that failed to pass on higher cost of materials to consumers. That pushed the bank's NPL ratio to 4.30%, from 4.12%, and it expects full year net income to drop 12.5% to ￥1.4 billion.
Fukuoka Financial Group Inc. reported that its loan loss provisions across its three affiliated regional banks more than tripled to ￥1.6 billion in the April-to-June quarter, mainly due to downgrades or bankruptcies of its borrowers. While the group's overall NPLs — standard, doubtful and bankrupt assets — declined 2.6% year over year to ￥306 billion in the April-to-June quarter, NPLs from bankruptcies alone increased 1.7% to ￥41.1 billion.
As of Oct. 9, US$1 was equivalent to ￥148.68.