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Japan's regional banks struggling to survive, some eyeing realignment

Higashi-Nippon Bank, Ltd. President Tomoo Okanda, left, and Concordia Financial Group, Ltd. President Kenichi Kawamura are seen at a news conference in Tokyo on Aug. 10, 2018. (Mainichi)

TOKYO -- Regional banks are struggling to keep themselves afloat amid the recent downturn in local economies, and some of them are even seeking broad realignment across borders of their local prefectures to survive.

Fukushima is one of the prefectures hit hard by the sluggish economy. Its population, which had stood at over 2 million before the triple disasters of the Great East Japan Earthquake, tsunami and nuclear crisis in March 2011, has declined to approximately 1.86 million. Special demand generated by the reconstruction of disaster-hit areas has shrunk, causing the local economy to slump.

As a result, local banks in the prefecture have stiffened their standards for loaning to local businesses.

The 38-year-old operator of an IT venture company in the city of Fukushima could hardly believe his ears when a local bank employee told him early last month that the financial institution could not extend loans for a project planned by his firm.

"It appears to be an interesting and promising project, but I can't gain permission from my boss (to go ahead with loans for the project)," the bank employee told the IT company operator at the firm's reception room.

The business operator had thought that his company would receive about 50 million yen in loans from the bank. The operator and the bank employee had cooperated closely in drawing up new business plans for more than a year.

The operator emphasized the advantage of the project and earnestly asked the bank to extend loans for the project, but the bank employee told him, "We need more certainty..."

Amid the rapid economic downturn, a growing number of companies in the prefecture have gone under in recent years.

According to credit research company Tokyo Shoko Research, Ltd., the number of cases of corporate bankruptcies in the prefecture in fiscal 2017 came to 57 for the third consecutive yearly increase. The total amount of debts incurred by local companies reached 23.2 billion yen, coming closer to the 30.8 billion yen recorded in fiscal 2011 following the triple disasters.

"A number of companies launched after the disasters have gone under," said an individual linked to the local financial industry.

The economic downturn has dealt a serious blow to the management of three local banks -- The Toho Bank, Ltd., The Fukushima Bank, Ltd. and The Daito Bank, Ltd.

In the business year ending in March 2018, The Fukushima Bank and The Daito Bank saw their sales and profits decrease and The Fukushima Bank even suffered a net loss for the first time in seven business years.

The worsening financial conditions of these banks have decreased their capacity to extend loans. As a result, the regional banks have become unable to sufficiently meet the needs of small and medium-sized local businesses and venture companies for loans, further cooling down the local economy.

In June, Hideharu Morikawa, then president of The Fukushima Bank, stepped down to take responsibility for its net deficit. In a rare move, the bank appointed Takahiro Kato, former senior managing director of its rival The Toho Bank, as its president in a desperate bid to turn itself around.

Many in the regional bank community view the appointment as a move toward future business realignment even though the two banks have ruled out such a possibility.

Many regional banks across the country are also facing growing financial difficulties because they cannot profit from loaning or investing in bonds amid the shrinking local economies and ultra-low interest rate policy adopted by the Bank of Japan.

There are moves to seek realignment of regional banks across prefectural borders. However, there is one case where realignment of regional banks led to wrongdoing.

Higashi-Nippon Bank, Ltd. has been ordered by the Financial Services Agency (FSA) to improve its business practices after the agency pointed out that the institution had padded the amount of loans it extended to its corporate clients by having the customers register business offices that did not exist or collect commissions whose basis was unclear.

Tomoo Okanda, president of the Tokyo-based bank, apologized for the wrongdoing. "We had excessively tried to expand our sales and profits over the past several years," he told a news conference in Tokyo on Aug. 10.

Behind the scandal is the April 2016 integration of management between Higashi-Nippon Bank and The Bank of Yokohama, Ltd. by setting up a joint holding company, Concordia Financial Group, Ltd.

A person close to Higashi-Nippon Bank said, "Board members at that time excessively pressured employees to increase sales and profits for fear that our bank would be engulfed by The Bank of Yokohama, whose total assets are seven times those of ours."

The banking industry has entered an age when banks are competing with each other across regional borders and business categories with the increase of lending and settling services through smartphones, according to Daisuke Yabuki of PwC Consulting.

Under such circumstances, regional banks face a serious challenge as to how they will take advantage of their community-based business activities to survive the unprecedented competition.

(Japanese original by Business News Department financial news team)

This is Part 4 in a series.

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