In a surprising move, Tokyo-basedSeibu Shinkin Bank saidFeb. 16 that it was raising its interest rate for three- to five-year fixed depositsand offering maximum 50% discounts on loans to small and medium-sized companies.The bank's announcement coincided with the Bank of Japan's implementation of a negativeinterest rate policy, which has prompted most Japanese banks to cut their own rates.The BOJ's new policy, announcedJan. 29, imposes a 0.1% fee on new deposits in excess of required reserves keptat the central bank.
Seibu Shinkin Bank is the onlyJapanese bank so far that has announced an across-the-board interest rate increase,effective March 1, of 0.01% for three- to four-year fixed deposits and an increaseof 0.02% for five-year fixed deposits. The same increase applies to all fixed deposits.Two other shinkin banks, KumamotoDai-ichi Shinkin Bank and OngaShinkin Bank, have also announced similar plans, but their interestrate increases were limited to a certain saving product, size of deposit or particularcustomers.
Shinkin banks are cooperativeregional financial institutions serving small and medium-sized enterprises and localresidents. At Seibu Shinkin Bank's headquarters, a sign declares the bank's intentionto return the benefit of the BOJ's negative interest rate policy to local residentsand companies.
S&P Global Market Intelligencespoke with Seibu Shinkin Bank President Kanji Ochiai about the bank's approach tothe negative interest rate policy in Japan. Seibu Shinkin Bank's loan-to-depositratio was the second highest among Japan's 267 shinkin banks in the fiscal yearthat ended March 31, 2015, at 72.9%. The average loan-to-deposit ratio for shinkinbanks is 50.4%, according to rankings by the Japanese monthly magazine FinancialJournal.
Ochiai disclosed that his bank'sloan-to-deposit ratio clocked in at 75.70% as of March 29. He also disclosed thatthe bank's total loans increased by ¥119.6 billion as of March 29 to ¥1.246 trillionfrom ¥1.127 trillion at the end of March 2015, while total deposits increased by¥101.3 billion to ¥1.647 trillion as of March 29.
What follows is an editedtranscript of the conversation with Ochiai. He spoke in Japanese.
S&P Global Market Intelligence:Could you explain why you raised interest rates for deposits and how you can affordto do it?
Kanji Ochiai: The BOJ's policy or government'spolicy has both pluses and minuses. We bankers look at the plus side of the policy.Our job is to provide support to our customers, local companies and local and regionalfinancial institutions. The BOJ's message is to lend as much as possible with lowerinterest, rather than keeping the money at the BOJ at a minus 0.1% interest rate.I would like to convey this message and help revitalize local regions. We decidedto provide loans at half price but did not lower our deposit interest rate likealmost all other banks in Japan because cutting the interest rate is not a big movewhen it's already so low. If we can help local companies with cheap loans, shouldwe lower our deposit interest rate? That would discourage consumer spending, whichis contrary to our desire to help companies revitalize the local economy by providingcheap loans. If you lower deposit rates or savings rates for your customers, howcan you revitalize the local economy? We [also have] plans [for] other measuresin response to the negative interest rate policy, though I cannot tell you detailsright now.
I read in media reports that you have moved ¥27 billion of deposits, outof a total of ¥87 billion, from the Bank of Japan to the Shinkin Central Bank.
Weplan to provide ¥27 billion in loans to our customers with maximum 50% discountrather than keeping the funds at the BOJ at either zero or minus 0.1% interest.Since we need more money to provide loans, we are keeping ¥27 billion at the ShinkinCentral Bank for the time being. The interest rate at the Shinkin Central Bank is0.125% for one- to three-year deposits, 0.05% for six-month deposits and 0.02% forthe next-day interest rate.
What is the difference betweenyour bank and two other shinkin banks, which also raised interest rates?
Theyare only paying higher interest rates on limited products and limited deposits aspart of a campaign to increase their deposits, while we are raising interest forfixed deposits for three to five years without any limit on the total amount acrossthe board.
What is causing the most negativepressure on profits for financial institutions, including shinkin banks?
The biggestnegative factor of the negative interest rate for financial institutions is thesuper low or minus yields of Japanese government bonds. But our bank has a highloan-to-deposit ratio, unlike many other shinkin banks that depend on returns fromJapanese government bonds because they are not able to provide loans to their customersdue to the weak local economy and industry.
Thereare other reasons why we decided to raise the interest rate. We are a cooperativeregional financial institution, not a shareholding company like the regional andmega banks. We protect our customers, while banks are protecting the interests oftheir shareholders.
How much impact will the negativeinterest rate policy have on your pretax profit?
It ishard to predict how much lower the BOJ will push the negative interest rate or howlong the BOJ will keep this policy.
I thinkthe negative interest rate may reduce our ordinary profit by about ¥200 millionto ¥300 million in the fiscal year beginning April 1 from the fiscal year endingMarch 31, 2016, due mainly to lower returns from JGBs and other securities investments.But we may be able to make up for the negative impact by increasing our loan volume.So far, we have seen no impact from the negative interest rate.
Some analysts expect the negativeinterest rate paid by the BOJ to fall as low as minus 0.5% in the next two years.What do you think?
If itis lowered to minus 0.5%, some banks may not be able to stay in business. It willalso depend on how far JGB yields will drop when the negative interest rate is minus0.5%.
Do you think that banks may introducefees for keeping bank accounts or make interest rate paid on deposits negative?
I donot think that banks will introduce a fee for keeping bank accounts for the timebeing. But if this policy continues for two or three or even five years and theBOJ lowers negative interest rates much more, the banks may consider charging feeson accounts.
You are increasing branches everyyear. What is your plan for this fiscal year?
We willcontinue to expand in Tokyo and in fact we want to increase by 10 branches everyyear if we can, but our human resources are limited. Our branch network only covers70% of Tokyo at the present.
Do you expect the negative interestrate policy to trigger more mergers among regional financial institutions?
Therewill be more mergers among the regional banks and shinkin banks but it is hard topredict the scale of such mergers or reorganizations since we do not know how longthe BOJ will continue this negative interest policy and how much it will lower therate. That is why I am not giving a more precise prediction. I expect this policywill continue for about two years.
Then, are you considering mergingwith other shinkin banks or any other regional financial institutions to expandnetworks quickly?
I amnot considering any merger at the moment. Our business model is a cooperative organization.It's possible in the future to merge with another cooperative organization, shinkinbank or credit cooperative, but we will not consider any merger with a shareholdingcompany like a regional bank. We feel that we have to go it alone because our strategyand what we do is so different from other cooperative financial institutions. Itis hard to do anything with others because it is hard for us to find any financialinstitution that would go along with our strategy.
As of March 31, US$1 was equivalentto ¥112.39.