Negative rates, fat margins: Japan regional banks ramp up car, holiday loans
10/03/2016 23:00
* Lenders pivot to unsecured, high-interest retail loans
* Negative rates squeeze business, mortgage loan yield
* Banks soak up higher risk as 'only way to make profit'
By Taiga Uranaka
TOKYO, March 11 (Reuters) - Japanese regional banks are
aggressively expanding their unsecured retail lending business,
lured by the segment's fat margins now the country's central
bank has squashed already ultra-low interest rates into negative
territory.
Unsecured loans, typically offering up to 1 million yen
($8,800) in fast cash for anything from shopping trips to
vacations, can command interest rates of close to 15 percent in
some cases - way above rates for business like mortgages or
small firm borrowing. Car loans are also popular.
Small-sized loans combined with high profit margins make the
risk of lending without collateral worth taking for the banks.
In an over-banked, low-return market, the hunt for domestic
yield is much more pressing for Japan's scores of regional
lenders than global giants like Mitsubishi UFJ Financial Group
Inc 8306.T , able to draw on overseas and investment banking.
Bank of Yokohama Ltd 8332.T , Japan's No.2 regional lender
by assets, said its outstanding unsecured retail loan portfolio
jumped 39 percent year-on-year to 59.4 billion yen ($527.5
million) for the first fiscal half ended last September.
Continued growth at that rate would see it beat its own target
of 70 billion yen for the 12 months through March.
"With interest rates falling on all other loans such as
business and mortgage loans, they are pretty much the only one
we can make profit on," said an official at the bank.
While Bank of Yokohama's unsecured loans make up only a
fraction of its overall retail lending of 4.9 trillion yen,
their margins are very attractive as borrowers are willing to
pay a higher interest rate for funds extended relatively easily
and quickly.
For instance, Bank of Yokohama's 10-year fixed mortgage rate
is 0.725 percent for borrowers rated most likely to repay debt.
Rates for free-purpose loans - unsecured lending where users can
borrow money to spend however they choose - can run from 1.9
percent to as much as 14.6 percent.
'EVERYBODY JUMPING IN'
Ryoji Yoshizawa, director at Standard & Poor's in Tokyo,
said demand for such loans is likely to increase. He said
consumers in Japan face a lack of real wage growth, despite
Prime Minister Shinzo Abe's best efforts to prod employers in
the world's third-biggest economy into paying staff more to
stoke consumer spending.
"In terms of profitability, it's almost the same as making
100 billion yen unsecured loans as making 1 trillion yen
mortgage loans," said one official at another large regional
lender, who declined to be identified because he was not
authorised to discuss the matter publicly.
For some, the appeal of the unsecured loan market initially
provided unwelcome echoes of rampant growth in Japan's consumer
finance industry in the last decade, which ended with regulators
intervening to clamp down on what they said were excessively
high rates and ordering compensation be paid to borrowers.
"Management at many regional banks were at first
uncomfortable with such lending, as they don't want the image of
loan shark," said an official at one of the regional lenders,
declining to be named. "But now, everybody is jumping in."
Chiba Bank Ltd 8331.T , Japan's third-largest regional
bank, said it increased unsecured retail loans by nearly 10
billion yen to 99.2 billion yen in the six months ended
September. It now wants to expand these loans to 130 billion yen
by the end of March, 2017.
As the unsecured loan sector grows, so too is another
business line - guarantors.
Many banks pay fees to non-bank speciality companies to
guarantee their portfolio of unsecured loans. Orient Corp
8585.T , one of the largest guarantee providers, said its
outstanding guarantees for regional banks stood at 396 billion
yen as of the end of last September, up 24 percent from two
years earlier.
($1 = 113.5600 yen)
(Editing by Lisa Jucca and Kenneth Maxwell)
((taiga.uranaka@thomsonreuters.com; +81-3-6441-1813; Reuters
Messaging: taiga.uranaka.reuters.com@reuters.net))
Keywords: JAPAN BANKS/LOANS