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Japan's Suga to zero in on ailing regional banks if elected prime minister

Speeding up the consolidation of struggling Japan's regional banks is likely high on the agenda of Yoshihide Suga, who is widely expected to officially succeed Shinzo Abe as prime minister later this week, analysts said.

Suga, 71, was elected president of the ruling Liberal Democratic Party on Sept. 14. He is likely to be officially appointed prime minister in the parliamentary election on Sept. 16 because of the majority held by the LDP's ruling coalition.

Revitalizing small towns and rural areas, which have been for years hit by declining and aging population and thus low economic growth, will be one of the policy focus of the Suga administration, he told a press conference previously.

"I'm from the countryside and I’m so familiar with conditions of rural areas," Suga, who hails from Akita Prefecture in the northern part of Japan's main Honshu Island, said Sept. 14. Earlier in September, after he announced his bid for the LDP's leadership, he also told reporters there are "too many" regional banks and reorganization is "an option" for them to stay afloat.

Hit by ultra-low interest rates, rising loan-loss provisions and weak loan demand, about 60% of 78 listed Japanese regional banks reported profit declines or losses in the first fiscal quarter ended June 30, according to Mitsubishi UFG Morgan Stanley Securities Co. The brokerage expects the combined earnings of those local lenders to fall to the lowest level in at least eight years in the current fiscal year ending March 2021.

"It's interesting that one of the first areas where Suga made a comment on economic policy was regional banks," Michael Makdad, senior analyst at Morningstar, said. "It's clear that the government wants to push consolidation."

Reviving local economy

Regional banks have been slow to merge despite the government's repeated calls. And in May, the lawmakers stepped up their push by approving a new policy to exempt regional banks from antitrust law, which will clear a major obstacle for consolidation in future. The legislation will take effect in November.

The commercial case for consolidation becomes stronger, as local businesses, the major clientele for regional banks, have been hit hard by COVID-19 disruptions.

"As he [Suga] aims to activate local economies, he will seek to restore regional banks," Takahide Kiuchi, executive economist at Nomura Research Institute, said. "During his tenure, some more regional banks could be consolidated." He added that Suga had pushed the Financial Services Agency to coordinate with the Free Trade Commission on the antitrust legislation.

"Chances are high that he [Suga] will take action [to push mergers of banks] to show his presence as new prime minister," Makoto Kikuchi, CEO of Myojo Asset Management, said.

Suga served as the chief cabinet secretary for more than seven years for Shinzo Abe, who announced last month he would resign as prime minister for health reasons. One of Abe's signature policies was concentrating on economic recovery while the Bank of Japan kept the monetary policy loose.

Regional bank shares rally

Suga's recent comments on regional banks have sent shares of some lenders higher. The share price at Fukushima Bank, for example, soared 70.5% between Sept. 2 and Sept. 14, while the Nikkei average index inched up 1.3%.

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The lender is directly competing against Tohoku Bank and Daito Bank in the prefecture of Fukushima, which the FSA said earlier can only accommodate one bank.

The FSA said in 2018 that 23 regions across Japan could not even support one bank, 12 regions could support just one lender and 10 other prefectures could only accommodate up to two banks.

Fukushima Bank got cash infusion from SBI Holdings Inc. in January in exchange of a 19% stake. A bank spokesman declined to comment on whether it will be considering merging with two other banks in the prefecture.

"If raising new common equity or preferred equity instead of merging is an option, I think many regional banks will try to choose it over M&A despite the government's wish for consolidation," Makdad said. "But the worse the future outlook for profits becomes, the harder it becomes to raise new capital if needed."