Hiroshi Iwama and Mitsunori Watanabe used to joke about merging their banks in central Japan. When the Bank of Japan introduced negative interest rates last year, things got serious.
The two golfing buddies run Mie Bank Ltd and Daisan Bank Ltd, two of Japan’s roughly 100 regional lenders. For years, these banks dotting the nation have faced headwinds as rural areas emptied and aged.
With the monetary policy shift, their plight became acute.
“It changed from being something we might have to think about someday to something we had to think about now,” Daisan president Iwama, 62, said in an interview.
Daisan and Mie, led by Watanabe, also 62, announced plans to merge in February.
With the pressure showing few signs of easing, more banking executives are coming to the same conclusion.
Consultancy Bain & Co estimated that about half of Japan’s lenders will disappear by about 2025 as they face a stark choice — merge or close.
Despite the existential threat, many Japanese banks remain resistant to teaming up due to long-standing rivalries and different corporate identities.
Regional banks are “highly proud” institutions and “many of them wouldn’t even be able to change their names,” former Japanese Financial Services Agency head Hirofumi Gomi said in an interview. “It’s hard to imagine a wave of mergers and reorganization given the history of regional banks to date.”
The introduction of negative interest rates has crushed banks’ lending profitability, in a further blow to the financial ecosystem in rural areas that has been strained by more than two decades of economic stagnation and population flight to large cities.
Unlike so-called megabanks such as Mitsubishi UFJ Financial Group Inc, regional lenders do not have the global reach or financial muscle to escape the pressures by expanding overseas.
Combined profit at Japan’s 82 listed regional banks fell 11 percent in the year ended March 31 and is likely to drop another 17 percent this fiscal year, SMBC Nikko Securities Inc analysts forecast in May.
Banks that cannot find a way to cope with muted loan demand and razor-thin lending margins “face extinction,” S&P Global Ratings analyst Ryoji Yoshizawa said.
“The profitability situation for regional banks is very severe,” said Yoshizawa, who has worked in the Japanese banking industry for 30 years.
While large lenders have made certain progress after merging years ago and redeploying staff, “it’s clear that regional banks need to do more,” he said.
There are glimmers of hope.
Regional lenders have struck 21 mergers or alliances since 2003 and the pace is gradually picking up, Daiwa Institute of Research Ltd said.
Three deals have been announced this year as banks seek to boost their loan books, eliminate competition and save costs by unifying functions, but even merging is no panacea.
By 2025, banks will need loan assets of at least ¥8 trillion (US$70.5 billion) at their core lending businesses to be profitable, Daiwa Institute of Research forecast.
Only a handful of regional banks clear that hurdle, and Mie and Daisan will reach just one-third of the threshold after combining.
“What banks do with loan business is basically all the same, so economy of scale is key,” Daiwa Institute of Research managing director Hayanari Uchino said.
Trying to achieve that scale might invite the attentions of the competition watchdog.
The Japan Fair Trade Commission has been holding up a planned merger by Fukuoka Financial Group Inc and Eighteenth Bank Ltd on the southern island of Kyushu since last year, citing monopoly concerns.
SMBC Nikko Securities analysts have described the prospects of completing that deal as “grim.”
Regional banks thrived during the heyday of Japan’s post-World War II revival as small businesses built factories and household incomes grew.
Now, finding borrowers in rural areas is tough, because the demographic outlook there is the worst.
Mie Prefecture’s population is forecast to drop 13 percent by 2035, more than the 9.3 percent decline projected nationwide, the Japanese National Institute of Population and Social Security Research said.
One of Mie Prefecture’s largest employers, food manufacturer Imuraya Group Co, maintains a relatively equal balance in borrowing from Mitsubishi UFJ, Daisan and another local bank, Hyakugo Bank Ltd, Imuraya chairman Takeo Asada said.
He said Daisan and Mie would complement each other geographically in the north and south of the prefecture, and create a stronger institution together.
“Regional banks have rich local information, which can be extremely useful,” Asada said in an interview.
Daisan recently helped Imuraya, the maker of Japan’s much-loved Azuki Bar, a frozen red bean snack, to find an idled factory to lease, he said.
Daisan and Mie are hoping that their deal would make it easier to get more business in urban areas that have better growth prospects. The new entity would have a network of 34 branches in neighboring Aichi Prefecture, home to manufacturing powerhouses such as Toyota Motor Corp.
“It would take considerable time to open a new branch and bring it into the black in the current interest rate environment,” Watanabe said. “From that perspective, we’re buying ourselves some time.”
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