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No silver bullet for Japanese regional banks fighting low interest rates

Regional banks in Japan are stepping up efforts to overcomenegative interest rates, but there is no silver bullet.

Some banks are diversifying their operations to businesses notreliant on interest income, such as asset management, but without muchexperience, it is questionable how competitive they can be in those new areas.

Their main business is not getting any easier either. Japanis a crowded market for lenders, with about 100 regional commercial banks andsome 400 nonprofit institutions, according to the Financial Services Agency.With survival at stake in a lackluster economy that is losing people,competition among them is only intensifying.

Challenges for banks in the country are exacerbated by thelate-January central bank move to apply a negative rate to some deposits fromcommercial banks. Since the surprise decision, the yield on 10-year Japanesegovernment bonds has slipped into negative territory. In line with that, theaverage lending rate for new domestic bank loans fell to a record low of 0.793%in February, according to the latest central bank data releasedMarch 30.

Lenders are not fully passing the central bank deposit costto customers, sacrificing their margins. As the business environment toughens,regional banks have in recent months announced various plans to expand theirrevenue bases.

In December 2015, Yamaguchi Financial Group Inc. it will create an asset managementjoint venture with DaiwaSecurities Group Inc.

The business was established in January, with YamaguchiFinancial holding a 90% stake. It is awaiting approval from the Ministry ofFinance, a spokesman at the banking group said. Yamaguchi Financial said inApril that it also hired a veteran asset manager who had worked at for about three decades.

Yamaguchi Financial is also among seven companies, includingNishi-Nippon City BankLtd., that in March agreed to buy stakes in an asset managementfirm owned by Tokai TokyoFinancial Holdings Inc.

"Regional banks have been holding a huge amount of cashfrom their depositors, but they are struggling to find a place to put themoney, so Tokai Tokyo decided to offer to do asset management businesstogether," a Tokai Tokyo spokesman said.

Some companies are looking further away for ways to putmoney to better use.

On Feb. 8, government-controlled and itsasset management unit said they teamed up with , and to jointly invest up to¥10 billion in overseas private equity funds.

But it is far from certain such endeavors will succeed.

"These regional banks hardly have experience or skillsin asset management. How are they going to be successful?" Takashi Hiroki,chief strategist at brokerage Monex Inc., said in an interview.

Lending is becoming more challenging as well. Thecompetitive landscape is changing, as retail customers can now compare and pickbank products more easily on the Internet, without being bound by geographies,Hiroki said.

"The older generation would stick to their local banks,but the younger generation has no reason to do so when they can choosecompetitive offers from any bank on the Internet," Hiroki said.

Corporate borrowers are dwindling, too, as companies movefactories overseas, while small businesses disappear as their owners retire,said Shinya Furue, a senior researcher at Norinchukin Research Institute Co.

As a result, regional banks are putting more money insecurities, such as government bonds that earn them paltry income. In the sevenyears to March 2015, profit from their core operations fell 14.75%, whiledeposits grew 19.98%, according to data from the RegionalBanks Association of Japan. Their government debt holdings grew 57.08%during the period.

Without many profit sources, lenders that lose borrowers mayeventually go out of business.

"Only banks that can develop their own originalbusiness models for lending would survive," Furue said.

As of April 5, US$1was equivalent to ¥110.46.