September 6, 2017 / 10:08 AM / 2 years ago

UPDATE 1-Over half of Japan's regional banks losing money on core businesses - report

* Japan’s smaller banks hit by low rates, depopulation

* Regulator fretting over health of regional banks

* Over 50% losing money on core businesses - draft report (Adds details, context)

By Takahiko Wada

TOKYO, Sept 6 (Reuters) - Profits from lending and fees at Japan’s smaller banks are falling faster than expected amid ultra-low interest rates, with more than half of the institutions losing money on these core operations, the financial regulator warned in a draft report.

The Bank of Japan’s radical monetary policy, which has seen interest rates fall to near or below zero, has squeezed lenders across the country, especially the more than 100 regional banks whose local economies are slumping due to depopulation.

Many of these smaller banks are staying in the black only thanks to securities trading, which could in turn open them to new risks, according to the draft of an annual Financial Services Agency report, which was seen by Reuters on Wednesday.

The FSA has fretted for some time about the long-term health of regional banks, which hold about half the country’s $4 trillion in outstanding bank loans.

The agency warned smaller banks in July that they must find new ways to make money if they are to survive, saying many of them face risks when interest rates eventually rise and that some are already in a precarious state.

“We do not see any problems in their financial health, but many regional banks are struggling to boost profitability from their core business,” according to the draft report for the year through June, which is to be released next week.

In last year’s report, the FSA projected that the share of banks losing money on their core businesses would rise to about 60 percent in 2025 from about 40 percent, but the new draft shows the figure is already more than 50 percent.

“Some of the banks seem to be expecting the environment will improve in the near future led by a possible rise in interest rates,” the draft says. “But it is uncertain whether the banks can enjoy lending margins again as the environment could continue to be unfavourable for the banks.”

The draft report also says banks rely heavily on collateral in making loan decisions, which disadvantages smaller companies even if they have the potential for strong growth. (Reporting by Takahiko Wada; Writing by Junko Fujita; Editing by William Mallard and Kim Coghill)

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