Struggling Japanese regional banks go over the edge to cut losses

They’re bearing the brunt of the profit crunch.

The protracted squeeze on Japanese bank earnings over the last decade as a result of ultra-low interest rates and a rapidly shrinking population is dealing the largest blow on regional lenders, according to Fitch Ratings, which may prompt them to resort to unscrupulous acts in an effort to stop the bleeding.

This follows the case of Suruga Bank who published a report highlighting an aggressive corporate culture that witnessed employees resorting to fraudulent activity to meet unrealistic growth targets and the resignation of Higashi-Nippon Bank chairman in August over improper lending practices.

“[T]he tough domestic environment has affected the whole Japanese banking sector, and other banks may have allowed governance standards to slip in response to these challenges,” Fitch Ratings said in a statement.

Regional banks have come under the most pressure in the sustained squeeze as they generate around 85% of gross profit from net interest revenue, noted Fitch. They also do not have the luxury of turning to overseas markets like their mega-counterparts MUFG Bank, SMBC, Mizuho Bank, Saitama Resona Bank and Resona Bank who have been steadily growing footholds to weather crippling conditions back home.

“[R]egional banks face the challenge of developing infrastructure to efficiently service less-densely populated markets with older customers who can be uncomfortable with technology,” added Fitch.

Although lenders could develop new products to meet the changing needs of the ageing market, regional banks have limited expertise in more complex products like savings and wealth management, insurance, retirement planning, and re-mortgaging.

As a result, regulators could look into mergers to boost efficiency and competitiveness of the struggling players whilst lending support to geographical diversification and address risk concentrations, noted Fitch, citing the recent merger between Fukuoka Financial Group and Eighteenth Bank.