Although Japan's three largest banks have raised their cost-cutting targets after another year of weak earnings and elevated costs, analysts said the lenders could do more to streamline their operations.
The need to overhaul Japan's banking system has become more urgent in recent years amid persistently low interest rates, an aging population, the rise of technology and a slowing economy. However, instead of becoming leaner, the cost-to-income ratios of all three lenders have been rising since the quarter ended Sept. 30, 2018.
"The pace of cost-cutting for Japanese banks is quite slow compared with U.S. banks or European banks, which finalized their cost-cutting measures in the past years," said Chizuru Tateno, director for financial services and international public finance ratings at S&P Global Ratings.
On May 15, when Mizuho Financial Group Inc. reported an 83.2% year-over-year decline in net profit for the fiscal year ended March 31, it ratcheted up its targets on branch closures and layoffs.
The lender said it would cut 100 branches by March 2022, doubling the target of 50 it set in November 2017. By March 2025, 130 branches will be closed, compared to 100 in the 2017 plan. It had 500 branches as of March 2018.
The bank also expects to slash 19,000 staff out of its workforce of about 80,000 before the scheduled deadline of March 2027.
Mitsubishi UFJ Financial Group Inc. also plans to reduce its total domestic branch count by 35% by March 2024, up from its initial target of 20%, according to an investor presentation. It had approximately 500 full-fledged branches as of March 2018. It expects its employee headcount to fall by approximately 6,000 over the same period through attrition.
Meanwhile, Sumitomo Mitsui Financial Group Inc. expects to achieve annual cost reduction of more than its target of ¥50 billion by March 2020. It also aims to achieve annual cost savings of ¥100 billion in the medium term.
Michael Makdad, an equity analyst at Morningstar Inc., said in a May 20 research note that MUFG, the largest of the trio by assets, "seems to lack sufficient urgency about cost reductions, in our view, despite the fact that its consolidated expense ratio rose more than 3 percentage points in the just-ended year to 71.1%."
Layoffs, branch closures are difficult
One reason for the slow pace in cutting headcount and closing branches, among other turnaround measures, is that the banks meet strong resistance in deploying drastic measures, and they have to wait for people to retire or leave, said Tateno.
Japanese companies tend to avoid aggressive layoff programs due to strict labor laws and cultural reasons. Legally, companies need to justify eliminating jobs for business reasons according to strict standards, including demonstrating that they have exhausted all avenues to avoid job redundancies.
Meanwhile, large-scale layoffs remain taboo in Japanese working culture, although some large corporations have been moving away from guaranteeing lifetime employment due to the difficult business environment.
The banks' slowness in making decisive moves to cut costs is also partly due to a "lack of pressure on management from Japan's famously patient shareholders," said David Marshall, co-head of Asian financials research at CreditSights.
"I think this makes it particularly challenging for the Japanese banks to know where they can close branches without losing customers, which will cause their own business to shrink. I am not sure they can avoid that fate — they just need to cut costs faster than their revenues shrink."
Tateno added that banks should reduce new hiring more than originally planned considering the adverse business environment in domestic lending business and the progress in reduction of workloads.
Further, shutting down branches is a massive undertaking for the megabanks, which have branches all over Japan. "It takes a lot of planning and a lot of time," Makdad wrote. Costs will gradually come down in the next several years, he added.
Overseas expansion a double whammy
Meanwhile, the banks have also been expanding overseas aggressively to make up for the shrinking revenue from home and that has pushed up overall costs. For instance, MUFG, whose overseas footprint includes the U.S., Indonesia, Vietnam and the Philippines, said its overseas loans constituted 39.8% of its loan book as of March 2019.
Tateno said that while the megabanks have made some progress in reducing their domestic costs, MUFG and Sumitomo Mitsui Financial's investment into overseas operations is offsetting any savings. "If they expand their overseas businesses, they have to increase regulatory cost in each country. If we look at the expense ratio, it has been increasing in the past years," she said.
For example, MUFG reported that its general and administrative expenses increased for the fiscal year ended March 31 to ¥2.65 billion from ¥2.62 billion. The bank attributed this to an increase in expenses for overseas operations resulting from the expansion of overseas business and global financial regulatory compliance.
Makdad wrote that MUFG's latest cost-cutting targets gave him a "slightly negative impression" because "no specific plans to improve efficiency at operations outside Japan were revealed."
MUFG saw its cost-to-income ratio rise to 73.61% for the fiscal year ended March 31 from 62.42% in the prior year, while Mizuho said its ratio rose to 79.67% from 71.52%, according to S&P Global Market Intelligence data.
Yet, even if the megabanks follow through on achieving deep cost cuts, that may not be sufficient to make up for a fall in revenue in their domestic banking business over time.
"It's not the case that this cost cutting is going to lead to a large profit increase. What it is is that they can keep profits at the same level by cutting costs," Makdad said.
As of May 29, US$1 was equivalent to ¥109.34.
To see the branch footprint for a bank, go to its profile on the website. On the left-hand side, select "Branch Map" under the section "Market Analysis." Here is an example for Mitsubishi UFJ Financial Group.