TOKYO • Japan's regional banks need a little shaking up: There are far too many of them, profits from loans are shrinking, and their customers are disappearing.
The enormous privatisation of Japan Post coming up next month may just help spur them into action.
State-owned Japan Post Bank, one of three companies going public as part of a US$12 billion (S$17 billion) initial public offering next month, currently has restrictions on its business that could eventually be loosened once it is public, allowing it to make loans and accept higher amounts of deposits than currently permitted.
That would put the biggest collector of Japanese savings into more direct competition with the country's 105 regional banks, which are resisting calls to merge even as their prospects dim.
"There should be more rationalisation in the banking sector in Japan, and I think it probably could be a trigger," said Mr David Marshall, a senior analyst at research firm CreditSights in Singapore.
If Japan Post Bank is willing and able, "they could compete quite effectively for retail lending and mortgage loans", he noted.
Japan Post Bank's three-year-old application for permission to start services such as home loans remains stalled at the Financial Services Agency (FSA).
Yet, once at least 50 per cent of the bank is eventually sold and in private hands, it will be able to start new businesses without the approval of the financial regulator, according to the company.
Ruling-party lawmakers have proposed to raise a cap on the amount of deposits that Japan Post Bank can accept from 10 million yen (S$116,000) an account, a move that could suck savings from regional lenders into the postal bank, which already holds about 178 trillion yen in deposits.
Most of the money is invested in government and corporate bonds.
Local banks have about 11,000 branches nationwide, less than half the 24,000 of Japan Post.
The lenders argue that it would be unfair for Japan Post to expand into areas such as mortgages or have a higher cap on deposits as long as the government still holds a stake, suggesting the state would bail it out in times of trouble.
"We're not wrestling in the same sumo ring," Mr Tatsumaro Terazawa, chairman of the Regional Banks Association of Japan, told reporters last month. "They still have an implied government guarantee."
With interest rates hovering near record lows in a country still battling deflation, banks are already struggling to make money from doling out credit.
Total net interest income has declined at regional banks for the past seven years, FSA data shows.
The agency estimates that profits at one in five regional banks in the year ending March 2018 will be less than half what they are now as returns on lending shrink.
Japan's regional lenders mainly cater to small businesses and residents in places like Kofu, a city west of Tokyo in the shadow of Mount Fuji, where the downtown area has a half-dozen bank branches and three post offices.
The government is selling about 11 per cent of Japan Post Holdings and its banking and insurance units in a three-pronged IPO that may raise about 1.4 trillion yen, making it the country's biggest privatisation since Nippon Telegraph & Telephone in 1987.
Through additional share sales, it will eventually fully divest the bank and insurer, while keeping at least a third of the parent company.
Shares of the postal bank and insurer were priced at the top end of marketed ranges for the IPO, a regulatory filing showed on Monday.
That gives the bank a valuation of 6.5 trillion yen, similar to Sumitomo Mitsui Financial Group, the nation's second-biggest lender by market value, Bloomberg calculations show.
Regional banks have been operating in Japan's 47 prefectures for more than a century, and the number of them has not changed much since World War II.
They survived the bad-loan crisis in the 1990s that led to the creation of Japan's three megabanks - Mitsubishi UFJ Financial Group, Sumitomo Mitsui and Mizuho - because they had less exposure to big companies unable to repay their debts.
Almost 80 per cent of regional banks surveyed by Bloomberg News said they want to remain independent.
Regional lenders have shown a willingness to work with Japan Post, such as by using the postal bank as an agent for some services.
That is necessary and encouraging, according to Kobe University Professor Nobuyoshi Yamori.
Cooperation "allows private banks to restructure their operations smoothly and become cost efficient," said Prof Yamori, whose research encompasses banking and the economy.
We have been experiencing some problems with subscriber log-ins and apologise for the inconvenience caused. Until we resolve the issues, subscribers need not log in to access ST Digital articles. But a log-in is still required for our PDFs.