Japan Post IPO might just shake up lagging regional lenders

[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 privatization of Japan Post coming up next month may just help spur them into action.

State-owned Japan Post Bank Co, one of three companies going public as part of a US$12 billion initial public offering next month, currently has restrictions on its business that could eventually be loosened once it's 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 David Marshall, a senior analyst at research firm CreditSights Inc in Singapore. If Japan Post Bank is willing and able, "they could compete quite effectively for retail lending and mortgage loans." Japan Post Bank's three-year-old application for permission to start services such as home loans remains stalled at the Financial Services Agency. 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. That means it's a question of when, not if, it will be able to start lending to homeowners and businesses.

Suck Savings Ruling-party lawmakers have proposed to raise a cap on the amount of deposits that Japan Post Bank can accept from 10 million yen ($84,000) per 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," Tatsumaro Terazawa, chairman of the Regional Banks Association of Japan, told reporters in September. "They still have an implied government guarantee." Near Zero 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 show. 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. While they have developed close ties with their customers, local banks have also grown vulnerable to the country's struggling rural economies as older people retire and younger generations migrate to cities in search of work.

"Having more options is a good thing," said Hiroe Tanaka, 47, an office worker in Kofu, which has a population of about 200,000. She has accounts at local lender Yamanashi Chuo Bank Ltd and Mizuho Bank Ltd, part of Mizuho Financial Group Inc, as well as the postal bank.

The government is selling about 11 per cent of Japan Post Holdings Co 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 Corp 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 Monday. That gives the bank a valuation of 6.5 trillion yen, similar to Sumitomo Mitsui Financial Group Inc, 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 hasn't 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 Inc., Sumitomo Mitsui and Mizuho - because they had less exposure to big companies unable to repay their debts.

Almost 80 percent of regional banks surveyed by Bloomberg News said they want to remain independent.

"The situation for some regional banks will be severe if they remain as they are," said Masayoshi Yonezawa, an analyst at Daiwa Securities Group Inc. in Tokyo. "Something needs to change." Not all banks are against coupling. Bank of Yokohama Ltd, Japan's largest regional lender by market value, will merge with Higashi-Nippon Bank Ltd. next year to form a holding company called Concordia Financial Group Ltd. Kyushu Financial Group Inc. began trading on the Tokyo Stock Exchange on Oct 1 following the combination of Kagoshima Bank Ltd. and Higo Bank Ltd.

Fukuoka Financial Group Inc, created in 2007 from the merger of three lenders in Japan's southern island of Kyushu, has benefited from consolidation, according to Shunsaku Sato, senior credit officer at Moody's Investors Service. The lender achieved 15 per cent in cost savings in its first five years of combined operations, Mr Sato wrote in a September report.

The Topix Banks Index of 85 Japanese lenders has risen 11 per cent this year as of 2:15 pm on Tuesday in Tokyo, exceeding the 6.5 per cent gain in the benchmark Topix Index.

Necessary, Encouraging 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's necessary and encouraging, according to Kobe University Professor Nobuyoshi Yamori.

Cooperation "allows private banks to restructure their operations smoothly and become cost efficient," said Mr Yamori, whose research encompasses banking and the economy. Japan Post can serve the most isolated rural areas, allowing banks to close branches that they might otherwise feel compelled to keep open, he said.

It will take time to build a lending business from scratch, and the country's low interest rates and tepid credit demand mean Japan Post may not be in a hurry to do so. The bank has indicated its immediate priority will be to boost returns by shifting more of the money it invests in government bonds, currently about half of its assets, into alternatives such as foreign debt.

"What is the rationale of a business model where people place their money in deposits and the company taking the deposits just buys bonds?" said Marshall at CreditSights. "If they don't lend, what are they going to do?"

BLOOMBERG