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Japan's regional banks to bear brunt of Bank of Japan bombshell

Fri 29th January, 2016 2:17pm
By Thomas Wilson 
    TOKYO, Jan 29 (Reuters) - The Bank of Japan's shock move to 
impose negative interest rates is another blow to regional banks 
already hit by low returns on lending and weak corporate 
borrowing, and may add to pressure for them to consolidate or 
accept the advances of bigger rivals. 
    Regional banks have long struggled to put their huge cash 
reserves to profitable use. Now, they face charges to keep 
deposits with the BOJ, and government bonds are less attractive 
than ever. 
    "We're in trouble, it's very tough," said an official at a 
regional bank near Tokyo. "Each of us will have to start from 
scratch to think of a strategy for the next fiscal year." 
    Beyond parking cash at the BOJ, options for Japan's smaller 
banks are limited. 
    "Banks have been hit hard," said Yasuo Sakuma, portfolio 
manager at Bayview Asset Management, referring to the BOJ's 
decision. "It's particularly serious for regional banks with low 
loan-deposit ratios, which may well act on pressure for 
restructuring." 
    Corporate demand for borrowing has been weakened by slow 
economic growth at home and abroad, meaning firms are reluctant 
to invest in either plant machinery or raise wages. 
    That is despite sustained pressure on them from Prime 
Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda to spend 
more on equipment and wages. 
    Last month, Kuroda stressed that companies needed to spend 
further on new innovation and increased salaries to assist the 
BOJ in reaching its two percent inflation target.  
    The head of the Keidanren, Japan's biggest business lobby, 
responded with only conditional support, underscoring the 
difficulty policymakers face in persuading risk-averse Japanese 
companies to spend. 
     
    RUNNING OUT OF OPTIONS 
    For regional banks, alternatives to lending to companies, 
such as passing on negative interest rates to customers, are not 
an option. 
    "For the small- and medium-sized banks whose reserves are 
parked at the BOJ, negative rates will be a big problem," said 
Takashi Hiroki, chief strategist at Monex. "They'll find it very 
hard to pass on the costs to individual customers." 
    Reflecting those concerns, Tokyo Stock Exchange's banking 
index  .IBNKS.T  hit its lowest level since October, 2014, after 
the BOJ's announcement, falling 2 percent despite a 2.9 percent 
gain in the wider Topix  .TOPX  index. 
    Shares in regional banks fell, with Fukuoka Financial Group 
 8354.T  dropping 3.6 percent and Bank of Yokohama Ltd  8332.T  
shedding 2.2 percent. Investors also sold shares in major banks, 
with Mitsubishi UFJ Financial Group  8306.T  losing 2.8 percent. 
    Japan's roughly 100 regional banks account for around half 
of the country's outstanding bank loans, which were last month 
worth 432 trillion yen ($3.6 trillion), according to the BOJ.  
    Unlike Japan's top three "megabanks," which have offset weak 
domestic demand for loans with an aggressive buildup of overseas 
lending, most regional banks only compete domestically, mainly 
extending low-risk loans to small and mid-sized businesses. 
    Loan interest rates have been falling amid fierce 
competition among lenders. 
    Japan's Financial Services Authority has been encouraging 
regional banks to consolidate since 2014, as a response to 
falling demand caused by Japan's greying population. 
    However, only three regional banks have consolidated in the 
past three years. 
    The BOJ's Kuroda said on Friday at a news conference 
following the decision that while negative interest rates may 
have a short-term impact on financial institutions, he did not 
expect a major impact. 
    ($1 = 120.7800 yen) 
 
 (Additional reporting by Taiga Uranaka, Tomo Uetake and Emi 
Emoto; Editing by Mike Collett-White) 
 ((t.wilson@thomsonreuters.com; 81-3-6441-1598; Reuters 
Messaging: t.wilson.thomsonreuters.com@reuters.net)) 
 
Keywords: JAPAN ECONOMY/BOJ BANKS
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