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More regional bank deals likely in Japan's Kyushu region, analysts say

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More regional bank deals likely in Japan's Kyushu region, analysts say

The Bank of Japan's introduction of and 'sproposed acquisitionof Eighteenth BankLtd. are likely to speed up M&A among regional banks in Japan'ssouthern Kyushu island, as the region's declining population drives competitionin the banking space.

Fukuoka Financial on Feb. 26 announced plans to first makeEighteenth Bank a wholly owned subsidiary of the group by April 2017 and thenmerge it with subsidiary ShinwaBank Ltd. in Nagasaki prefecture a year later. Fukuoka Financialwill become the biggest regional banking group in Japan in terms of totalassets after it brings Eighteenth Bank into its fold.

"This will speed up banking consolidation in Kyushu,which will be dominated by three banking groups since we expect the otherfirst-tier banks to join those groups," Takashi Miura, a vice presidentand banking analyst at Credit Suisse Securities (Japan) Ltd., told S&PGlobal Market Intelligence.

Miura noted that the top three banking groups in Kyushu —Fukuoka Financial, KyushuFinancial Group Inc. and Nishi-Nippon City Bank Ltd. — are only interested inmerging with strong first-tier banks such as Bank of Saga Ltd., Oita Bank Ltd. and Miyazaki Bank Ltd.

Other, weaker second-tier banks may opt to form a group orperhaps merge with other banks outside of Kyushu, Miura added, citingTOMONY Holdings Inc.in Kagawa prefecture in Shikoku island as an example of a merger of twosecond-tier banks in different prefectures.The group also agreed to buy another second-tier bank, in Osaka, in April2015.

The Kyushu island has a total of 18 regional banks in sevenprefectures. Fukuoka Financial will have four banks under its holding companyfollowing its acquisition of Eighteenth Bank. The other three are , and ShinwaBank. Compared with Fukuoka Financial, Nishi-Nippon City Bank has moved more slowlyon the consolidation front after its establishment in 2004 as a result of themerger of Nishi-Nippon Bank and Fukuoka City Bank Ltd. It also owns second-tierbank Bank of NagasakiLtd.

While Nishi-Nippon City Bank announced in October 2015 thatit was considering setting up a holding company, it has denied planning mergerswith other banks. "We are considering setting up a holding company byOctober 2016 to make our group management more effective, not for merging withother banks," said Hidekazu Hasegawa, a Nishi-Nippon Bank spokesman.

Deals such as Fukuoka Financial's proposed acquisition ofEighteenth Bank make sense since the region does not need so many banks givenits declining population, Shinji Koyanagi, a research fellow at the researchdepartment of the Kyushu Economic Research Center said in an interview.

For Eighteenth Bank, difficulty in finding a long-termgrowth strategy amid the sharp decline in Nagasaki's population was a key factorbehind its decision to merge with Fukuoka Financial, according to YoshinobuYamada, a senior banking analyst and managing director of Global MarketResearch at Deutsche Securities Inc. in Tokyo.

Yamada contested the notion that BOJ's negative interestrate policy was another reason behind the proposed merger, saying the banks hadbeen in talks for a long time before the BOJ announced that policy in lateJanuary.

Another senior financial analyst at a foreign financialinstitution expects more shakeups in the Kyushu banking sector going forward."There has been widespread cross-shareholdings among the regional banks inKyushu for over 50 years and there are good communication networks among thebank presidents," the analyst said, explaining that it is presidents thatusually initiate tie-ups, not investment banks or securities firms.

Tomoaki Kose, head of the corporate planning section ofKyushu Financial GroupInc. unit KagoshimaBank Ltd., agreed that more mergers are likely. Kose, however,denied a report in The Nikkei thathis bank is planning to set up a second headquarters in Fukuoka city, sayingthey are planning to integrate two branches of and one branch ofKagoshima Bank in Fukuoka city to improve its operations.

The developments come at a time when Kyushu is beginning tointegrate its economy, thanks to improved roads and railways. That willfacilitate integration of its financial sector, said Tsutomu Muramoto, aregional financial institutions specialist and professor of economics at SeijoUniversity in Tokyo.

Consolidation among regional banks, however, is likely totranslate into more competition for banks as the three big financial groupscrowd into Fukuoka city and Fukuoka prefecture.

"Banks in Fukuoka prefecture are wondering how tosurvive because the competition is becoming so fierce," Muramoto said.

S&P Global MarketIntelligence is owned by McGrawHill Financial Inc.