Japanese Regional Banks: The Trade to Start 2020

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Changing demographics make these “discount” banks an intriguing proposition

Japanese regional banks are starting to look for new capital as it becomes increasingly challenging to grow in a low-interest-rate environment.

In a move similar to what we saw happen in the United States back in 2010. The regional banks tend to be located outside the major population centers and have been dealing with a demographic issue as the population ages and declines. They also face problems with the rising costs of technology and cybersecurity, like those driving U.S.-based consolidation.

Japanese Regional Banks

The Japanese Financial Services Agency recently reported that of the 105 regional banks, 45 had booked a loss in their core business for at least two straight years, and 27 of those have lost money for the last five years. 66 of the 102 regional banks reported lower net profits for the six months ended in September, and five posted losses. The 102 banks saw their net profit fall 13.8 % year over year to 435.5 billion yen as credit costs doubled to 106.7 billion yen.

The FSA has been encouraging banks to combine and consolidate to gain the scale necessary to manage the rising costs and credit problems. SBI Holdings is one larger Japanese firm that is moving to provide capital and possibly acquire regional banks to grow its banking business. CEO Yoshitaka Kitao told the Wall Street Journal last week that they were in discussions with at least ten regional banks and have done deals with two already. SBI spent $10 million for a 17.9% stake in Fukushima Bank Ltd. for about $10 million and spent $23 million into Shimane Bank Ltd.

Quite a Discount in 2020

Last summer, Mr. Kitao unveiled a plan that called for his bank to invest almost $1 billion in as many as 7- regional banks. He said at the time that “These banks are coming to us with the hope that they can find a way out of their plight by teaming up. The key thing is how to change them by utilizing the internet and fintech as a weapon.”

Finally, Mr. Kitao told the Journal that he views the investment risk as low since most regional banks trade well below their book value. As of the end of the third quarter, Japanese regional banks traded at just 0.32 times book value on average.

By Tim Melvin

Related: Japan’s Mammoth Pension Fund Will No Longer Lend Shares to Short Sellers

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