* Japan FSA will press regional banks on long-term strategy
* March, April meetings meant to push for mergers, tie-ups
* Regional banks profitable now; face demographic time-bomb
By Taiga Uranaka and Noriyuki Hirata
TOKYO, March 4 Japanese regulators are
increasing the pressure on regional banks to consolidate,
worried that shrinking populations outside the nation's major
cities will leave lenders too weak to stand on their own.
After direct prodding from the head of the Financial
Services Agency (FSA) for the more than 100 regional banks to
slim down through mergers or takeovers, the regulator has set up
meetings with regional bank presidents to grill them on their
long-term business plans.
The agenda is implicit but clear, bankers and regulators
say: show how you plan to survive over the coming decades as
local economies wither, or look for tie-ups. The FSA's push will
likely accelerate a process, dictated by demographics, that had
been expected to take decades, banking industry insiders say.
Top executives at regional banks have shown no public signs
of moving toward consolidation. They tend to be local
heavyweights, reluctant to share power by merging with other
lenders and diluting their status. "Many bank presidents are
thinking it's not going to happen on their watch," said an
executive at one regional bank.
"Regional banks are feeling growing pressure from
authorities to consider consolidation," said Natsuko Ishida, a
financial sector analyst at Moody's Japan. "Bank executives who
were thinking about consolidation in a timeframe like 10 years
are now under pressure for a shorter time span."
FSA Supervisory Bureau chief Kiyoshi Hosomizo told regional
bank executives in mid-February, "In many regions, the decrease
in population is continuing, and as a result, we can expect that
deposits will peak out," according to minutes of the meeting
reviewed by Reuters.
At the meeting, attended by a phalanx of senior FSA
officials, Hosomizo told bankers that regular hearings in March
and April will press them on "how each bank will craft its
short-, medium- and long-term strategies."
They will be grilled not only on their current business
areas, but also about how the financial sector should be more
broadly, including neighbouring areas, the minutes show. This is
code for regional banks to consolidate, said a former top FSA
official. The oblique presentation reflects the regulator's
"true feelings versus what must be said in public".
Those true feelings are already clear enough, as national
loan demand has shrunk 10 percent over the last two decades -
with the hinterlands the hardest hit.
FSA chief Ryutaro Hatanaka told regional bank heads in
January, "We would like you to consider business alliances and
mergers as management issues," according to minutes previously
reviewed by Reuters.
An FSA spokesman declined comment on the agency's plan for
smaller financial institutions.
Change, when it comes, could be dramatic.
TOO FEW BORROWERS
Twenty-three Japanese banks melded into today's four major
banking groups over the tumultuous 15 years of post-bubble
economic and financial crisis through 2005. Regional banks,
which extend roughly half of Japan's $4 trillion outstanding
bank loans, have largely been spared the knife so far.
They are awash with pension savings, but cannot find enough
borrowers. They have set aside more cash than needed for loan
losses and are now able to release some excess reserves, giving
them what a senior executive at a major national bank says will
be a two- to three-year earnings bump.
But that windfall can't long mask the prolonged weakness of
regional banks' core business. While net income has jumped,
lending profits fell 4-5 percent in the six months to September
from a year earlier, as loan demand from companies and
individuals remains stubbornly weak.
Regional banks are largely tied to the fortunes of their
local prefectures. Aside from Tokyo, Osaka and a few others, the
outlook for the working-age population - and thus the prospect
for loan demand - is grim. Japan is the fastest-greying
industrial power, and rural populations are ebbing even faster
as the dwindling numbers of young head for the cities and the
ranks of the remaining elderly swell.
"As loan interest rates keep falling, some banks are
hard-pressed to convincingly explain how they plan to increase
revenues," said a senior executive at a regional bank near
WRITING ON THE WALL
While regional bank executives may be reluctant, the
industry as a whole can see the writing on the wall.
"Regional bank mergers are necessary because local economies
also need to be integrated into bigger markets," said a senior
investment banker specialising in regional banks.
A potential spark, bankers say, could be the December return
to the stock market of Ashikaga Holdings Co Ltd,, 10
years after the failed regional bank was nationalised.
A possible poster child for the consolidation drive is
Fukuoka Financial Group Inc, the biggest regional bank
by assets. The group, based on the southwest island of Kyushu,
was created by a merger of lenders in the region and is
considered a winner with its growing loan balances.
The group last week nominated Vice President Takashige
Shibato as president, to be effective in late June. "Merger is
one of the strong strategic options in the future," Shibato
(Additional reporting by Sumio Ito and Emi Emoto; Editing by
William Mallard and Ian Geoghegan)