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Japan's regional bank profits may sink deeper as loan-loss provisions surge

Smaller regional banks in Japan are likely to report the lowest earnings in at least eight years in the current fiscal year ending March 2021, analysts say, after community and rural lenders more than doubled their loan-loss provisions in the fiscal first quarter as COVID-19 was added to their growing list of challenges.

Credit costs, or called loan-loss provisions in other markets, of 26 regional banks that disclosed consolidated earnings for the April-to-June periods in both 2019 and 2020 totaled ¥18.02 billion in the end-June quarter, up from ¥8.56 billion a year earlier, according to S&P Global Market Intelligence. And on an unconsolidated basis, credit costs of 78 regional banks in Japan in the fiscal first quarter rose 46% to ¥67.9 billion from a year ago, according to an Aug. 17 report by Mitsubishi UFJ Morgan Stanley Securities Co.

Those 26 regional lenders reported a combined net profit of ¥46.74 billion in the first quarter, up from ¥13.72 billion a year earlier, according to S&P Global Market Intelligence. However, the combined earnings of the 78 regional banks surveyed by Mitsubishi UFJ Morgan Stanley slid 42% from a year earlier to ¥200.62 billion, according to the brokerage.

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"The fact is that their [regional banks'] businesses are in tough conditions," Yuusuke Yasuoka, an analyst at Mitsubishi UFJ Morgan Stanley, said. "Chances are high" that the combined earnings for this fiscal year could fall short of their targets, as more than 10 regional banks have not reassessed the coronavirus effect on their profit outlook.

The 78 regional banks estimated in May they aimed at earning ¥590.9 billion of net profit in the fiscal year ending in March 2021, the least in eight years, the brokerage said. The projection for the current fiscal year is down 23% from ¥767.7 billion in the fiscal year ended March 31, and less than half of ¥1.223 trillion in the fiscal year ended March 2016.

Risk rises as lending grows

The growing amount of loans provided to smaller businesses hit by the COVID-19 has forced regional banks to increase loan-loss provisions. Those lenders have for years been hit by an aging population and low economic growth in non-urban areas in Japan, while the prolonged public-health crisis raises the default risks of borrowers.

Lending by regional banks grew 5.1% in July, accelerating from a 4.7% increase in June and rising for the fourth consecutive month, according to data released by the Bank of Japan August 11.

Meanwhile, Japanese bankruptcies in July increased 8.2% from a year earlier to 847, with total liabilities of ¥104.8 billion, and was the highest since 918 cases in October 2013, Teikoku Databank reported.

The struggle of the regional banks raises expectations that some of them will consolidate among themselves or with nonbanks in cross-industry mergers to streamline operations and cut costs, or tap into nonbanking expertise to survive the tough market.

The Japanese government encourages consolidation in the banking industry. The lawmakers approved a new policy in May for regional banks to exempt them from antitrust law for potential mergers, and the country's financial regulator said such tie-ups would help alleviate intensifying competition in shrinking local markets.

"I want the regional banks to make the best use of the special law to strengthen their businesses," Yoshihide Suga, chief cabinet secretary who last week announced his bid for the president of the ruling Liberal Democratic Party, said at a Sept. 3 press conference. "It will be up to each bank's judgment but reorganization could also be an option."

Suga is one of three candidates to succeed Prime Ministry Shinzo Abe who on Aug. 28 announced his intention to step down.

"Smaller banks may not be able to survive by themselves," Yasuoka said.

As of Sept. 7, US$1 was equivalent to ¥106.27.