Japanese regional banks need to cut costs more aggressively after efforts to expand revenue sources via expansion did not play out as expected.
Some local lenders are thinking about closing branches or streamlining their organization and staff, as programs aimed at increasing revenue — the other side of the profitability equation — struggle to show results, according to bank officials and analysts. Additionally, banks will be eligible for state subsidies if their cost reduction progress meets the central bank's requirements.
Lenders such as The San-in Godo Bank Ltd. and The Chukyo Bank Ltd., for example, are worse off after expanding their lending business to larger metropolitan cities where competition is more intense than in their home markets. Their capital ratios and returns on lending are declining while credit costs are rising, dragging on earnings, even though overall loan volume is growing.
"Under the tough circumstance, cost reduction, although limited, is a must for [regional banks] to support profitability," said Ikuko Samikawa, principal economist at Japan Center for Economic Research, or JCER.
Regional banks, which mainly provide retail banking services outside metropolitan areas and in rural regions, have been looking for new income sources as they have been slow to close unprofitable branches or reduce headcount, in part due to the Japanese cultural norm of lifetime employment. Some regional lenders that serve rural or remote areas have posted losses or profit declines in recent years amid ultralow interest rates, high operating costs and weak loan demand as people move away from rural areas.
Central bank incentives
To encourage regional banks to cut costs more aggressively, the Bank of Japan, or BOJ, in September offered an additional 0.1% interest on their deposits with the central bank if the lenders cut overhead costs as required under the plan or merge with peers.
Eligible banks must have cut overhead costs by at least 1% in the fiscal year ended March 2021 over the previous year. In addition, they should trim costs by at least 3% in the current fiscal year and more than 4% in the following year. Excluding the subsidies, the central bank pays interest rates of between negative 0.1% and 0.1% on lenders' deposits.
Nearly 80% of about 100 local lenders are eligible for the BOJ offer that totals ￥74.5 billion per year, according to an estimate by JCER. That amount represents about 8% of combined net profit of the lenders in the fiscal year ended March.
The Chukyo Bank has "aggressive" plans to cut costs over the next three years, a spokesman said. These include consolidating branches and cutting headcount through voluntary retirement plans, a rarity in the Japanese banking industry.
The San-in Godo Bank aims to save ￥800 million in annual costs for the next three years by reducing branches and ATMs and reorganizing its affiliated units, a spokeswoman said. The bank expects its overheads ratio to drop to 52.5% in the current fiscal year ending in March 2022, from 54.96% in the previous year. The ratio is expected to fall further to 50.1% in the following year.
"Cost savings are our biggest agenda," said the spokeswoman. The San-in Godo Bank is located in the Shimane Prefecture, ranked the 12th most depopulating prefecture among the 48 regions in Japan.
Both lenders were already eligible for the BOJ subsidy in the fiscal year that ended in March.
Missed expectations
The renewed focus on cost cutting highlights the dilemma lenders face between expanding to new markets and surviving competition.
"Staying in our home market won't improve anything for us," said the spokeswoman at San-in Godo Bank. "But going into other areas is building pressure on us from competition there."
The regional bank's average loan yields in the Tokyo and Osaka areas stood at 0.48% and 0.75%, respectively, as of March 31, compared with 1.31% in its hometown. However, Tokyo and Osaka also presented attractive loan growth, up 55.2% and 29.3% in the end-March fiscal year from a year earlier, respectively. That compares with a 15.7% growth in its hometown.
The lender’s CET1 ratio, a measure of core capital adequacy, shrank to 11.9% as of March 31 from 14.3% five years ago. "We also lack in expertise or experience to assess the credit of borrowers [in urban areas]," resulting in higher credit costs, the spokeswoman added.
The Chukyo Bank, headquartered in Aichi Prefecture, a castle-town that is home to Toyota Motor Corp., has also forayed into the loan market in Tokyo.
Its loan yield fell to 0.91% in the fiscal year ended March from 1.01% in the fiscal year to March 2019. The falling return in part reflects the bank's entry into Tokyo, where interest rates on loans are lower than those in its home market, the spokesman said.
Its lending in the urban area grew 39.4% during the three-year period, compared with a 15.2% gain in its home market. The lender does not report loan yields by region.
"In Tokyo, regional banks are overwhelmed by the megabanks," said Takahide Kiuchi, executive economist at Nomura Research Institute.
Japan’s three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — charged an average 0.78% interest rate on loans during this fiscal year through March and enjoy lower funding costs due to vast networks of depositors. Those banks do not provide a breakdown of their yields by region.
As of Nov. 11, US$1 was equivalent to ￥113.99.
