Analystsare not convinced that a partnership deal between and will help themslash costs as the companies hope, saying the two regional banks may end upjoining some of their peers in merging to survive a population decline.
ChibaBank and Musashino Bank said the partnership will yield ¥10 billion in synergiesover the next five years. Further, the two banks reportedly plan to increasetheir stakes in each other to 3% in five years and collaborate in sellingfinancial products and share certain clerical functions. Currently, Chiba Bankhas a 0.61% stake in Musashino Bank, while Musashino Bank has a 0.14% stake inChiba Bank.
Analystsview the banks' estimate for synergies as unrealistically high, saying they mayeventually consider a merger.
"Ithink their claim of a synergy effect of ¥10 billion in the next five years istoo optimistic. Why it is that Chiba Bank and Musashino Bank announced thisdeal? Joyo Bank Ltd.and Ashikaga Holdings Co. Ltd.are merging and Bank of YokohamaLtd. and Higashi-Nippon Bank Ltd. merged (in the Kanto region).Chiba felt that they had to do something but were not able to find a good dealand Musashino was the only option, but Musashino wanted to keep itsindependence and did not agree to consolidation," Takashi Miura, a vicepresident and banking analyst at Credit Suisse Securities (Japan) Ltd., said inan interview.
Otheranalysts, including Yoshinobu Yamada, senior banking analyst and managingdirector at Deutsche Securities Inc., believe that the banks will merge in theend.
"Thismay be a pre-marriage period. They may consider other options [such asconsolidation] when Chiba and Saitama face declining populations after2020," Yamada said. "For now, the populations of Chiba and Saitamaprefectures are still increasing."
ChibaBank and Musashino Bank, however, insist they have no intention to merge in thefuture.
"Wewill not move to consolidation from this tie-up," a Chiba Bank corporateplanning division official said in an interview.
"Thereis no need to consolidate or merge. We did not want to spend time and energy ondeciding where we should have our holding company headquarters, such as inTokyo or Chiba, and how we would handle corporate governance if we set up aholding company. Even if we do not merge, we will have the same benefits aswith a consolidation through this alliance."
ChibaBank, the fourth-largest regional bank in terms of assets, is the leadingregional bank in Chiba prefecture, while Musashino Bank is a medium-sizeregional bank based in Saitama city, Saitama prefecture. As part of thepartnership deal, the two banks also agreed to refrain from opening branches ineach other's markets.
RyojiYoshizawa, director and chief banking analyst at Standard & Poor's RatingsJapan K.K., said it was unclear if the market strategy will help boost profitsat the two banks. "This seems to be a gentlemen's agreement that they willnot compete in each other's markets," Yoshizawa noted.
Further,Yoshizawa expects more tie-ups of this type than consolidations among regionalbanks, saying some regional banks think such a tie-up may be an alternative tomergers.
Whilemedia reports suggested the two banks will boost their stakes in each other to3% in five years, Musashino Bank spokesman Yuichiro Matsumoto said the bankshave not yet made a decision on the stake increases. "We havenot decided how much we will increase our stakes in each other's banks. Some mediasuch as Toyo Keizai reported that wewill increase those stakes to 3% but I do not think we will increase them thatmuch," Matsumoto told S&P Global Market Intelligence.
Matsumotoclaimed the banks have so far found more than 400 ideas to cooperate on toreduce costs, but he declined to give details. Chiba Bank'sofficial, on the other hand, said the lenders will cut costs through jointdevelopment of products and services and IT systems by jointly using groupcompanies such as group securities companies and asset management companies andunifying some back office operations.
CreditSuisse's Miura questioned the scale of those savings.
"Theysay there are more than 400 cases for cooperating through this tie-up, butthere is no real cost reduction or other effects if the banks do not reducebranches, or unify their back-office operations and establish one headquartersto reduce staff. The two banks say that their total synergy effect will be ¥10billion in the next five years including cost reduction and profitcontribution." Miura said. "But investors only look at their profitand loss and do not think that it will help them to increase their P&L thatmuch."
Asfor the "gentlemen's agreement," Matsumoto said Musashino Bank has neverconsidered doing business in Chiba, while Chiba Bank has just three branches inSaitama prefecture. Musashino Bank has three branches in Tokyo and one inIbaraki prefecture, outside of its main base of Saitama. Chiba Bank has threebranches in Saitama prefecture, 12 branches in Tokyo and one in Ibarakiprefecture.
"Wehave some overlapping business areas such as Tokyo and other areas where wewill compete with each other. So we do not have any understanding not tocompete in each other's markets or in Tokyo," the Chiba Bank officialsaid. Musashino Bank had a 14% market share in terms of loans in Saitamaprefecture in the fiscal year that ended March 31, 2015, while Chiba had a39.3% market share in terms of loans, according to figures compiled by the Financial Journal.
MusashinoBank said the tie-up with Chiba Bank has nothing to do with the negativeinterest rate policy in Japan as the alliance was under discussion since fall 2015.
DeutscheSecurities' Yamada does not agree. "Japaneseregional banks are being affected and will be affected by the negative interestrate and their net profit is likely to decline in the next three fiscal years.They need mergers to cut costs and the negative interest rate is giving them apush in that direction," he said.
S&P Ratings and S&PGlobal Market Intelligence are owned by S&P Global Inc.
As of April 28, US$1 wasequivalent to ¥108.57.