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Fukuoka Financial, Eighteenth Bank deal on hold as antitrust review drags

andEighteenth Bank Ltd.are more than a month behind their plan to sign a final merger contract, heldback by an antitrust review.

Thetwo regional lenders have missed an Aug. 30 target date to sign a definitivemerger agreement, as Japan Fair Trade Commission's review of the deal ispending. Under a basic pact signed Feb. 26, Fukuoka Financial plans to acquireEighteenth Bank in April 2017 and combine it with the group's unit a year later.That time frame remains intact for now.

TheFTC is seeking more information from both parties, Taketoshi Ito, a spokesmanfor the regulator, told S&P Global Market Intelligence. The commissionreceived initially required documents from the companies June 28 and requested morea month later, he said. The banks said they have submitted the additionalinformation but declined to provide details.

Thesigning of a binding agreement has been delayed because the FTC's antitrustreview "is taking longer than we had expected," Tomoki Inada, aspokesman for Eighteenth Bank, said in an interview. Under Japanese law, anymerger between companies of certain sizes in terms of revenue is subject toadditional scrutiny from the commission.

Themerged entity of Eighteenth Bank and Shinwa Bank, both based in Nagasakiprefecture, would control more than two-thirds of loans and half of deposits inthe region. Eighteenth Bank accounted for 35.8% of loans and 28.6% of depositsin the region in the fiscal year ended March 31, 2015, while Shinwa Bank had a33.9% share in loans and 24.8% in deposits, according to latest annual datacited by the Financial Journal.

Yet,a common way of examining the scope of their operations is to look at theirpresence in the Fukuoka economic zone or the whole of Kyushu island, whichincludes Nagasaki, said Ryoji Yoshizawa, director and chief banking analyst atStandard & Poor's Ratings Japan K.K.

TheFTC may be reviewing what market share criteria it should use, Yoshizawa said.

Thedeal will likely be approved in the end though, because any antitrust concernswill probably not be enough to outweigh a government push for consolidationamong regional banks. There are about 105 regional lenders across Japan, whichthe Financial Services Agency considers too many for a shrinking market with adeclining population. Since 2015, four pairs of banks in the country haveannounced plans to merge.

FukuokaFinancial is not considering any contingency plan in case the FTC rejects thedeal, said Teppei Mizoe, a manager in the company's corporate planningdepartment.

"Thebanks must be thinking there is a high chance of success, so they are doing thedeal," Takashi Miura, a banking analyst at Credit Suisse Securities(Japan) Ltd., said. "No regional bank deal has been scrapped due to marketshare or the anti-trust law in the past."

Inthe unlikely event of the FTC rejecting the merger plan, Eighteenth Bank, thesmaller of the two, may need to seek a partner in another prefecture, Miurasaid.

Thereare other companies potentially interested in a merger with Eighteenth Bank.Among them are Kyushu FinancialGroup Inc., based in Kumamoto prefecture and Nishi-Nippon FinancialHoldings Inc., based in Fukuoka prefecture, which are keen to expand theirmarket share in Kyushu, Miura said.

Yet,an FTC rejection of the deal between Fukuoka Financial and Eighteenth Bankremains a remote possibility.

"Theywould not have announced the basic agreement to begin with, it did not have ahigh chance of success," said Hajime Oyama, a regional bank analyst atJapan Credit Rating Agency Ltd.