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Bank of Yokohama merger plan signals shake-up for Japan's rural lenders

[TOKYO] Japan's second-largest regional lender Bank of Yokohama on Tuesday said it is considering a merger with a smaller rival, a move that could spur much-needed consolidation in an industry facing bleak prospects for growth.

The proposed deal would create the largest Japanese regional bank and could herald a new stage in an industry shake-up considered long overdue by authorities and industry insiders alike. "It is likely to prompt other banks to take some action," an executive at a rival regional bank said. "Even if not an outright merger or acquisition, there are likely to be business alliances among some banks," said the person, who was not authorised to discuss the matter publicly.

In separate statements, Bank of Yokohama, with 13.8 trillion yen (US$121.2 billion) in assets, and Tokyo-based Higashi-Nippon Bank, with 1.96 trillion yen in assets, said they were considering a merger but nothing had been decided.

Any such deal would create the biggest regional lender in Japan, topping current leader Fukuoka Financial Group Inc .

"In terms of scale per se, it may not be so big a deal," Standard&Poor's Ratings Japan analyst Ryoji Yoshizawa said."However, it could upset the balance of the current competitive landscape, in which banks have separate territories." Japan's roughly 100 regional banks extend about half of Japan's US$4 trillion worth of outstanding bank loans. But they have limited geographic reach, with many focusing on only one prefecture.

Japan is the fastest-greying industrial power and rural populations are ebbing even faster, as young people head for the cities. To avoid collapse, regulators are encouraging the ultra-conservative small banks to embrace change. "As I have been saying, regional banks face various degrees of issues such as the shrinking population," Finance Minister Taro Aso told reporters after a cabinet meeting on Tuesday.

"I've repeatedly said that banks, particularly regional banks, would face difficulties unless they consider various business operations, taking such things into account." Twenty-three Japanese banks melded into today's four major banking groups over a tumultuous 15 years ending in 2005, a period marked by Japan's post-bubble economic and financial crisis. Regional banks, however, have largely been spared the knife.

Industry officials attribute the slow pace of realignment to regional lenders' relatively stable earnings, which give executives a false sense of safety.

More than a dozen regional banks last week said their first-half results likely beat forecasts, as smaller bad loan costs buoyed profits. But their core lending business remains weak, raising questions about their long-term health.