Japan clears regional bank merger after regulator stand-off
Deal between Fukuoka and Eighteenth bank paves way for wave of consolidation
Japan has approved the first ever deal between two dominant regional banks, paving the way for a potential wave of mergers.
Fukuoka Financial Group and Eighteenth Bank agreed to join forces in February 2016 but the deal has been on hold for more than two years after a tug of war between Japan’s competition authorities and its financial regulators.
The decision to allow the deal sets a precedent that could lead to widespread consolidation in a Japanese banking sector plagued by ultra-low interest rates and declining regional economies.
“Given the remedies proposed by the parties, competition in any particular fields of trade is unlikely to be substantially restrained,” said the Fair Trade Commission, Japan’s competition watchdog.
Fukuoka Financial and Eighteenth Bank are the two dominant players in Nagasaki prefecture, on the western island of Kyushu, with a combined market share of 70-75 per cent in business lending.
Historically, that meant a merger was considered off limits. But the growing weakness of Japan’s regional banks in an environment with few lending opportunities and huge excess deposits has prompted a rethink.
Eighteenth Bank — with $22bn of deposits but only $13.5bn in loans — exemplifies the challenge for banks in ageing regions, which are full of pensioners with cash savings but short on growing companies that want to borrow. The population of Nagasaki prefecture is forecast to drop from 1.4m to less than 1m by 2045.
The two banks welcomed the FTC approval. In a joint statement, they said merging would allow them to achieve economies of scale, and maintain their network on Nagasaki prefecture’s many remote islands.
Like the rest of Japan’s 64 regional banks, Fukuoka Financial and Eighteenth Bank have been forced to increase their securities portfolios as the Bank of Japan’s programme of asset purchases and negative interest rates has driven them out of government bonds.
Japan’s Financial Services Agency has raised concerns about whether small regional banks have the risk management skills needed to handle portfolios of foreign securities, often including equity investment trusts and structured products sold by investment banks. It has promoted mergers so banks can invest in their systems and raise profitability.
Although the FTC initially balked at the resulting near-monopoly in Nagasaki, it agreed to allow the merger after the banks promised to divest some loans to rival regional banks, credit unions and the national megabanks. Fukuoka Financial and Eighteenth have also agreed to have their interest rates monitored by an independent entity.
During a wave of mergers in the 1990s and 2000s, Japan’s so-called city banks consolidated into three giant groups: Mitsubishi UFJ, Mizuho and Sumitomo Mitsui. They dominate the profitable business of banking for corporate Japan. However, the country’s huge retail deposits mainly sit at regional players and Japan Post Bank.