Negative rates, fat margins: Japan regional banks ramp up car, holiday loans

[TOKYO] Japanese regional banks are aggressively expanding their unsecured retail lending business, lured by the segment's fat margins now the country's central bank has squashed already ultra-low interest rates into negative territory.

Unsecured loans, typically offering up to 1 million yen (S$12,150) in fast cash for anything from shopping trips to vacations, can command interest rates of close to 15 per cent in some cases - way above rates for business like mortgages or small firm borrowing. Car loans are also popular.

Small-sized loans combined with high profit margins make the risk of lending without collateral worth taking for the banks. In an over-banked, low-return market, the hunt for domestic yield is much more pressing for Japan's scores of regional lenders than global giants like Mitsubishi UFJ Financial Group Inc, able to draw on overseas and investment banking.

Bank of Yokohama, Japan's No.2 regional lender by assets, said its outstanding unsecured retail loan portfolio jumped 39 per cent year-on-year to 59.4 billion yen for the first fiscal half ended last September.

Continued growth at that rate would see it beat its own target of 70 billion yen for the 12 months through March. "With interest rates falling on all other loans such as business and mortgage loans, they are pretty much the only one we can make profit on," said an official at the bank.

While Bank of Yokohama's unsecured loans make up only a fraction of its overall retail lending of 4.9 trillion yen, their margins are very attractive as borrowers are willing to pay a higher interest rate for funds extended relatively easily and quickly.

For instance, Bank of Yokohama's 10-year fixed mortgage rate is 0.725 per cent for borrowers rated most likely to repay debt. Rates for free-purpose loans - unsecured lending where users can borrow money to spend however they choose - can run from 1.9 per cent to as much as 14.6 per cent.

'EVERYBODY JUMPING IN'

Ryoji Yoshizawa, director at Standard & Poor's in Tokyo, said demand for such loans is likely to increase.

He said consumers in Japan face a lack of real wage growth, despite Prime Minister Shinzo Abe's best efforts to prod employers in the world's third-biggest economy into paying staff more to stoke consumer spending.

"In terms of profitability, it's almost the same as making 100 billion yen unsecured loans as making 1 trillion yen mortgage loans," said one official at another large regional lender, who declined to be identified because he was not authorised to discuss the matter publicly.

For some, the appeal of the unsecured loan market initially provided unwelcome echoes of rampant growth in Japan's consumer finance industry in the last decade, which ended with regulators intervening to clamp down on what they said were excessively high rates and ordering compensation be paid to borrowers.

"Management at many regional banks were at first uncomfortable with such lending, as they don't want the image of loan shark," said an official at one of the regional lenders, declining to be named. "But now, everybody is jumping in."

Chiba Bank, Japan's third-largest regional bank, said it increased unsecured retail loans by nearly 10 billion yen to 99.2 billion yen in the six months ended September. It now wants to expand these loans to 130 billion yen by the end of March, 2017.

As the unsecured loan sector grows, so too is another business line - guarantors.

Many banks pay fees to non-bank speciality companies to guarantee their portfolio of unsecured loans. Orient Corp, one of the largest guarantee providers, said its outstanding guarantees for regional banks stood at 396 billion yen as of the end of last September, up 24 per cent from two years earlier.

REUTERS