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Asia-PacificOctober 1 2015

Beyond the big three: how Japan's smaller banks are faring

Aside from its three mega-banks, Japan has a financial network that includes shinkin banks, co-operative banks and city and regional institutions. Stefania Palma explores how each is responding to Japan’s economic slowdown given their different mandates, structures and resources.
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Japan is grappling with macroeconomic and demographic challenges including an ageing population, a shrinking workforce, deflation, poor innovation and weak corporate competitiveness. The country's enormous network of regional banks working at grassroots level with small and medium-sized enterprises (SMEs) and local entrepreneurs could be the key to reviving its economy, say analysts.

The Bank of Japan implemented a low-interest-rate environment starting in the early 2000s to prop up the economy. Nevertheless, lending demand has remained limited due to deeper, structural troubles in the country. There is plenty of cash to be lent out, but few takers.

As a result, Japanese banks’ interest income has remained low, leading them to diversify revenue sources. Mega-banks – Mitsubishi UFJ, Sumitomo Mitsui Financial Group and Mizuho Financial Group – have focused on fee-based business and international operations. But other Japanese banks have smaller balance sheets to work with and are often community- or sector-based. So how are they coping?

This report looks at Japan’s shinkin bank model – co-operative, non-profit lenders servicing individuals and SMEs in a specific area – through a case study of Hamamatsu Shinkin Bank.

A profile of Norinchukin Bank will outline the response of Japan’s co-operative banking sector, which supports the country’s agriculture, fishery and forestry industries, to Japan’s economic slowdown.

Finally, an overview of regional banks Bank of Yokohama and Tokyo TY Financial Group and Tokyo-based commercial bank Aozora Bank will examine how larger, non-co-operative Japanese lenders are navigating the country’s challenging banking sector.

Hamamatsu Shinkin Bank 

Japan’s shinkin banks have a particularly tough remit: they have relatively small balance sheets and are allowed to operate only within the boundaries of the business territories stated in their articles of incorporation. This limits their revenue diversification possibilities significantly.

This means the performance of shinkin banks is somewhat predetermined by conditions in their areas. Their priority, now that Japan faces economic slowdown, is therefore to help revitalise their local economies.

Only individuals or corporates (with at most 300 full-time employees and Y900m [$7.47m] in capital) living, working or with an office in a shinkin bank’s area are qualified to be clients.

Operations of the shinkin bank organisation

Hamamatsu Shinkin Bank, based in the city of Hamamatsu and working within the western Shizuoka prefecture, is quite lucky. The area is home to Japan’s renowned automobile, musical instruments, machinery and metals companies that became exporters and earners following World War Two. It is the birthplace of Japanese giants such as Suzuki Motor Corporation, Yamaha Corporation and Honda Motor.

Even so, Hamamatsu Shinkin Bank’s net profits dropped by 37% between 2013 and 2014 to Y2.6bn. Its net interest income fell from Y14.181bn to Y13.698bn in the same period.

Shinkin banks in some of Japan’s poorest rural prefectures, such as Akita, Okinawa, Miyazaki and Kagoshima, are facing even harsher conditions. “Mega-banks can change their region of focus based on the change in profitable areas… [but] we cannot do that as regional-based ‘co-operative financial institutions’; we have to focus on enhancing our own area’s economy, and we have to serve for regional development,” says Kenichiro Mimuro, president and CEO of Hamamatsu Shinkin Bank.

Unlike city or mega-banks, shinkin banks cannot accumulate money in regional areas and then lend to main industrial areas such as Tokyo, says Mr Mimuro. Apart from breaking the shinkin banks’ code of conduct, this would lead to a scarcity of money in the region and a transfer of wealth to rich urban areas. “[Our] task is to gather money from local corporates and individuals, and to lend on to local entities,” he adds. 

Revitalising local economies

The shrinking of local economies remains the hardest challenges for shinkin banks. Japan’s ageing population, dwindling workforce and diminishing aggregate demand are all partly to blame. “In Hamamatsu, the population is decreasing, meaning the economy itself is shrinking,” says Mr Mimuro. Hamamatsu’s population is expected to drop from 800,000 to 690,000 in the next 25 years.

The sole advantage of an ageing population is wealth management opportunities, because wealthy people in Japan are mostly elderly. Hamamatsu Shinkin Bank has developed wealth management services for this demographic, including testamentary trusts.

The lender’s small corporate customers, however, are struggling. The number of SMEs shutting down outstrips new firms opening up. This means lending to SMEs is also falling. “The economy is good in Tokyo, but regional areas have not picked up as much,” says Mr Mimuro.

Financial problems, a narrowing local market and a lack of successors – linked to Japan’s demographic issues – are all part of the problem. “Sometimes owners don’t have children. Our merger and acquisition [M&A] department and major [Japanese] financial institutions co-operate in doing M&As for SMEs that do not have a successor so that they can keep their technologies and [sustain] regional employment,” says Mr Mimuro.

To offset the shrinking population and economic problems, banks need to go beyond lending and taking deposits, according to Mr Mimuro. “We need to find new business lines and provide new customer satisfaction,” he says. This includes supporting local entrepreneurs and new companies. “We are emphasising lending to developing industries such as medicine, renewable energy, care of the elderly and so on, which is contributing to the metabolism of the regional industry,” he adds. 

The bank also focuses on ‘business matching’ to help different clients grow through collaboration. Statistics suggest this may be working: the number of contract closures nationwide via shinkin banks’ business matching increased almost 16-fold between 2003 and 2012, from 453 to 7121, according to the National Association of Shinkin Banks.

Following clients out

Shinkin banks are also facing difficulties in the manufacturing sector. Before the collapse of Lehman Brothers in 2008, the sector was worth more than Y3000bn in annual productive sales. This figure dropped to Y2000bn thereafter and never recovered. But Mr Mimuro believes Japanese manufacturers still have a competitive advantage in technology. “We are trying to find a new field of business in which [manufacturers] can utilise their high technology,” he says. “We believe [our] area has a basic competitiveness but not enough business channels.”

One way to develop these channels is to support local companies’ international operations, with many of the bank’s SME customers having offices in other Asian countries. About 60 have factories in Indonesia, 30 in Vietnam and 10 in the Philippines. 

In 2014, Hamamatsu Shinkin Bank itself opened a Bangkok representative office as Thailand is its customers’ preferred destination for their offices after China, according to Mr Mimuro. Indonesia is in third place as it offers enormous opportunities for Japanese automotive manufacturers.

“Annual sales of motorbikes in Indonesia [can] reach 8 million. In Japan it is far lower,” he says. “Personal income in Indonesia and gross domestic product is also increasing, unlike in Japan.” Hamamatsu Shinkin Bank has already sent trainees to Jakarta to support its corporate clients.

Building in Japan

At home, Hamamatsu Shinkin Bank has built a remarkable network of 59 branches in western Shizuoka. In 2015, the bank opened a branch in the city of Fukuroi, where there were previously no offices for main regional banks. “Our opening was very appreciated, especially by SMEs,” says Mr Mimuro. “There is a branch of ours at every corner.”

The bank is also refurbishing up to three existing branches annually to make them more community friendly.

In terms of revenues, because lending remains unattractive due to low rates, Hamamatsu Shinkin Bank is increasingly focused on fee-based business. “We even see Wells Fargo doing the same,” says Mr Mimuro. This includes M&A and the bank’s international operations. “This is part of us changing our business to respond to Japan’s struggling economy,” he adds.

Luckily for Hamamatsu Shinkin Bank, it has a strong, supportive capital base (BIS capital adequacy ratio of 15.8% in 2014) – and therefore low costs of funding – thanks to the strong sectors it services. But not all shinkin banks are so fortunate.

“In the next few years, Japanese banks might face [even more] serious circumstances. But for us, strong capital gives us time,” says Mr Mimuro.

Shinkin banks could be crucial to Japan’s revival. They are dedicated to the real economy and its agents – SMEs, entrepreneurs and local individuals – which can breathe new life into Japan’s industry and reignite consumer spending. But shinkin banks are also vulnerable thanks to their smaller balance sheets and inflexible catchment areas. Not all of them can fall back on strong capital bases, for now. Special consideration for shinkin banks and their clients at institutional level could stir a dormant Japan.

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