Japan's regional banks to bear brunt of Bank of Japan bombshell
29/01/2016 14:17
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