Dealtalk: Japan's smaller banks, desperate for new revenue, turn to dealmaking
05/11/2017 22:00
(For more Reuters DEALTALKS, click on DEALTALK/ )
* Many smaller regional banks losing money on lending
business
* Small firm owners in past saw sale proposals as sign of
failure
* Owners cannot find successors, children have often moved
away
By Junko Fujita
TOKYO, Nov 6 (Reuters) - The grim outlook for Japan's
smaller regional banks, who are suffering as Japan's rural
population shrinks rapidly, is prompting some to dive into a
new, potentially lucrative line of business that until now was
largely taboo: mergers and acquisitions.
In Japan's traditional banking culture, advising a client to
sell a firm was considered unseemly, even rude - implying that
the business had failed.
Yet more small business owners in rural areas are struggling
to find successors because their children - who have often moved
to the big cities - are not interested in taking over. Some of
these owners are now being persuaded by the smaller regional
banks - numbering about 100 - that getting acquired isn't such a
bad solution.
When 70-year-old Kuniya Shinohara decided to retire from his
restaurant and catering business, he didn't know what to do
because his daughter and son-in-law weren't interested in taking
it over.
Shinohara's lender, Gunma Bank Ltd 8334.T , suggested he
sell his business in Maebashi city, about 80 miles north of
Tokyo, to an outsourcing agency called K'BIX Inc that was
looking to diversify.
"I was afraid I would become a loser by selling my
business," said Shinohara, who initially didn't want anyone to
know about the deal. "But Gunma Bank eased my concern by saying
an M&A could benefit both parties."
Getting commissions on such deals could provide a lifeline
to regional banks, whose profit margins are getting squeezed -
not only by the dwindling rural population and the closures of
family businesses but also by near-zero interest rates. Teikoku
Databank, a nationwide corporate research firm, released a
survey in 2016 showing that two-thirds of business owners across
Japan don't have successors.
NEW STRATEGIES
Traditionally, regional banks have focused on lending, which
fuelled their profits, said Hironari Nozaki, professor at Kyoto
Bunkyo University and a former banking analyst.
"That was not necessarily meeting their clients' needs," he
said. "Regional banks for a long time have failed to identify
clients' real problems."
That didn't matter when they could pull in the deposits and
then lend them out at an attractive margin. But now those
deposits aren't flowing in and margins have been squeezed with
rates low and as corporate customers in small cities aren't
expanding and therefore don't need to borrow.
Unlike the biggest banks, which have operations nationwide,
the business of regional banks is closely tied with the local
economies where they are headquartered.
Japan's Financial Services Agency, the nation's industry
watchdog, said last month that more than half of the nation's
regional banks lost money on their core business - lending and
fees - in the year to March 2017.
In the past, when many businesses were handed down from
father to son, banks tried to keep the value of businesses low
to reduce taxes, said Kazutaka Nobusawa, an official at Gunma
Bank's consulting division.
"Now we try to value the business as high as possible" to
bring income to clients, he said.
Gunma Bank, which in recent years arranged just ten M&A
deals annually, says about 7,000 of its clients are potential
candidates to acquire other businesses or be acquired.
And the Bank of Kyoto Ltd 8369.T in March brokered rice
wholesaler Shinmei Co's acquisition of Kobe Marukan Co, a
seafood wholesaler in nearby Kobe.
The bank, which employs 3,400 people, boosted the number of
staff devoted to M&A to 10 last year from three in 2012, and
aims to double its revenue from the division to 1 billion yen
($8.8 million) by the year ending March 2020, according to Bank
of Kyoto.
To the south, Fukuoka Bank Ltd, part of Fukuoka Financial
Group 8354.T , created an investment banking unit last year to
focus on M&A. And a recent seminar in Tokyo on M&A was attended
by representatives from about 30 regional banks.
The trend won't likely hurt the emergence of boutique
advisors that handle micro M&A deals, said Kunihiko Arai,
president of Strike Co 6196.T , one such dealmaker.
"Regional banks will not threaten our business because we
are interdependent," he said. "They need us when they look for a
matching partner beyond their turf."
Over time, the trend could prompt regional banks to be
merger candidates themselves because banks will need to expand
their reach outside their local areas to increase earnings
opportunities, said Nozaki at Kyoto Bunkyo University.
That would mean a consolidation in Japan's regional banking
sector, which has remained largely unchanged even as big "city"
banks have contracted from 21 to three "megabanks" over the past
20 years.
"Regional banks' resources are limited," Nozaki said. "How
they build their databases through alliances and reorganization
will be key."
($1 = 114.0700 yen)
(Reporting by Junko Fujita; Editing by Malcolm Foster and
Martin Howell)
((813-6441-1840, junko.fujita@thomsonreuters.com, Reuters
Messaging:junko.fujita.reuters.com@reuters.net;))
Keywords: JAPAN REGIONAL BANKS/M&A