The lenders are facing increased competition for deposits as an inexpensive funding source with interest rates rising, and new rivals such as internet-based banks are also growing
[TOKYO] Three decades after a bad debt crisis in Japan forced a wave of mergers that created its mega lenders, the focus now is on consolidation in the nation’s US$3 trillion regional banking industry.
Several mergers in recent months and cheaper valuations are spurring bets among investors that more deals are on the way among Japan’s 73 listed smaller banks. The lenders are facing increased competition for deposits as an inexpensive funding source with interest rates rising, and new rivals such as internet-based banks are also growing.
“I don’t think there’s a single regional bank president who isn’t thinking about consolidation,” said Toyoki Sameshima, an analyst at SBI Securities in Tokyo. “It is getting harder to attract deposits and I think that’s one of the changes that would prompt banks to consider consolidation.”
It wouldn’t be the first time for investors to speculate on whether Japan’s slow-to-change provincial and rural lenders will agree to restructuring that may also result in their firms being taken over.
But this time around, things look different: after decades of super-easy monetary policy, the Bank of Japan (BOJ) is raising interest rates, even as an ageing and shrinking population is limiting demand for deposits and loans. That suggests that for local lenders, keeping the status quo may not be the right answer.
They also face pressure as surging bond yields widen their paper losses on debt holdings, while steep price tags for technology investments loom as well. Meanwhile, some activist funds are searching for targets, and regulators are supportive of more dealmaking.
Regional banks hold more than 500 trillion yen (S$4.2 trillion) of total assets, and their ranks include big firms such as Yokohama Financial Group and Fukuoka Financial Group, both with total assets of over 20 trillion yen, Bloomberg-compiled data show.
Banks need scale, and that 20 trillion yen figure is the “threshold for survival” for regional lenders, said Katsunori Tanaka, chief investment officer of Japanese hedge fund Ariake Capital, which has been snapping up stakes in these banks.
“I don’t believe that consolidation is inevitable,” said Tanaka, a former Goldman Sachs analyst. “But from the standpoint of enhancing corporate value, it is certainly one of the most viable options.” He will consider raising stakes in banks and investing in other regional lenders, while declining to comment on specifics.
Deals are already underway.
Daishi Hokuetsu Financial Group and Gunma Bank, both based north of Tokyo, said in April that they plan to integrate their businesses. Meanwhile, in the home prefecture of Tokyo Disneyland, Chiba Bank and rival Chiba Kogyo Bank said in September that they plan to set up a holding company as a parent of the two firms. Ariake Capital had sold a 20 per cent stake in Chiba Kogyo to Chiba Bank earlier this year.
One big headache for regional banks is unrealised losses on yen notes. Total paper losses on regional banks’ yen bond holdings stood at about 3.3 trillion yen at the end of September, 2.6 times bigger than the level at the end of March 2024 when the BOJ ended its stimulus policy, according to Japan Asset Management Platform.
Such paper losses do not immediately threaten the financial health of banks. But profitable lenders have been able to sell these bonds at a loss and invest in higher-yielding notes, while those that are not able to do so remain stuck holding low-return assets.
Even after a rally in recent years, many regional bank stocks remain cheap, with their price-to-book ratios far below one, compared with the 1.19 average of the nation’s three biggest lenders, including Mitsubishi UFJ Financial Group, according to Bloomberg-compiled data.
Against this backdrop, firms such as Ariake Capital have been targeting the sector.
The fund has said that it holds stakes in more than 10 companies but declined to reveal specific names. Regulatory filings show they include Osaka-based Senshu Ikeda Holdings and nearby Shiga Bank. Sameshima of SBI Securities said Ariake Capital’s investments in the two banks “could become a trigger for further consolidation”.
In October, Ariake disclosed a 5.06 per cent stake in Aichi Financial Group, based in Nagoya in the home prefecture of Toyota Motor, where speculation of bank consolidation has been brewing for years. Aichi Financial itself was created in 2022 by the merger of two rivals.
An official at the Financial Services Agency (FSA) said that the regulator is watching Ariake’s moves closely and regional bank executives should engage in constructive dialogue with such investors.
The FSA is working on a policy package to increase regional banks’ ability to help revive local economies. It has been stressing that lenders need to boost their financial soundness by keeping up with anti-money laundering, cybersecurity and other compliance measures. These put a heavy spending burden on banks regardless of their size.
Nana Otsuki, a senior fellow at Pictet Asset Management Japan, expects regional bank consolidation to pick up speed, partly because of the additional resources needed. “Scale is critical for banks to be able to make necessary investments,” she said. BLOOMBERG
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