Regional lenders tend to be centered in the aging and declining parts of the country

By Suryatapa Bhattacharya and River Davis 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 16, 2019).

TOKYO -- One of the biggest and seemingly least attractive corners of world finance is getting another look.

Japan's regional banks, which together have nearly $4 trillion in assets, have been on a share-price roll since August, gaining more than 20% in many instances. And longtime financier Yoshitaka Kitao is generating buzz with plans to unite regional banks into a loose confederation under the banner of his company, SBI Holdings Inc.

In an email interview, Mr. Kitao said more than 10 regional financial institutions have asked his company to invest, and he has already announced two deals. In November, SBI said it would take a 17.9% stake in Fukushima Bank Ltd. for about $10 million, and the same month it injected about $23 million into Shimane Bank Ltd.

"We believe that investment risk is low" because regional bank shares have been beaten so far below their book value, Mr. Kitao said.

Investors have shunned regional banks until recently for good reason. While Japan's population increasingly lives in its biggest cities -- Tokyo, Osaka and Nagoya -- the regional banks tend to be centered in the aging and declining parts of the country. They are most exposed to negative interest rates, because their shortage of investment expertise makes it hard to find alternatives to traditional investments such as Japanese government bonds that yield little or nothing.

In the year ended March 2019, the collective net income of Japan's more than 100 first- and second-tier regional banks declined 23% compared with the previous year, according to the Financial Services Agency, the banks' regulator.

"The number of working-age people in Japan is falling, and in the long term Japan's working-age population number is tied to lending. So there's not a high chance that lending will suddenly increase going forward," an FSA official said.

The regulator and outside investors have been saying for years that combining banks is the only path to profit growth. With all the regional banks plus three national megabanks and an array of agricultural credit cooperatives, credit unions and other lenders, Japan looks seriously overbanked.

In the U.S., consolidation in banking has generally happened through outright acquisitions. In the early 2000s, the company then known as Wachovia Corp. built national scale by buying up weaker regional banks. Wachovia was purchased in 2008 by Wells Fargo & Co.

In Japan, however, regional pride and fear of job losses have kept many banks clinging to their independence, and only a handful have merged. More than half are headed into the red in the next decade absent a shake-up, according to the Bank of Japan.

U.S.-based activist investors say they hesitate to jump in because of the banks' high overhead costs.

"We have been following the banking sector in Japan but remain on the sidelines so far largely due to poor visibility on profit growth," said Aaron Stern, a partner at New York-based investment firm Fir Tree Partners. He says there could be "an interesting opportunity if a major shift in the industry, like significant industry consolidation, were to occur."

The plan by Mr. Kitao of SBI Holdings moves in that direction without calling for outright mergers.

He says regional banks that affiliate with SBI will get access to its financial products and services. Shimane Bank and SBI are setting up a joint branch at Shimane's headquarters some 380 miles west of Tokyo to sell stocks and bonds.

SBI will help update its affiliates' technology and business models, Mr. Kitao says, and eventually he sees the network amounting to a fourth megabank in addition to the three existing ones -- Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc.

"The essential factor in the revival of regional financial institutions is the strong will to change by themselves, and we will not invest in banks that do not have the will," Mr. Kitao said.

Mr. Kitao, 68 years old, has been a force in Japanese financial circles for more than three decades. Once a star salesman at the nation's top brokerage, Nomura Securities, he became No. 2 to SoftBank Group Inc. founder Masayoshi Son in the 1990s and helped engineer some of SoftBank's early acquisitions.

Later, he parted ways with Mr. Son and founded the company now known as SBI Holdings, which owns one of Japan's largest online brokerages. Though SoftBank initially invested in it, SBI is now fully independent from SoftBank.

Japan's regulatory agency, the FSA, is looking at legal changes that would make it easier for regional banks to merge.

"Historically, banks have had strict business constraints or limitations set by Japanese banking law," the FSA official said. "We have proposed some deregulation."

The agency is trying to create more room for regional banks to grow. In October, the FSA loosened the rule that restricts banks from holding a greater than 5% voting right in nonfinancial businesses, allowing them to take more regional businesses under their wing.

Write to Suryatapa Bhattacharya at Suryatapa.Bhattacharya@wsj.com and River Davis at River.Davis@wsj.com

(END) Dow Jones Newswires

December 16, 2019 02:47 ET (07:47 GMT)

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