In Nagasaki, bank consolidation may expose flaws in economic rescue plans

By Leika Kihara and Takahiko Wada
NAGASAKI, Japan (Reuters) - The merger of two regional banks in Nagasaki, once seen as a consolidation model, may expose flaws in Prime Minister Yoshihide Suga's plan to revitalize the regional economy by creating stronger lenders.
In Nagasaki's distant past, the city was a center of commerce and finance. Nowadays, Japan's bigger ports are sucking up all business, and local banks crippled by a stagnating economy and shrinking customer base are looking for profit.
This made the October 1st merger of Eighteenth Bank and Shinwa Bank a potential test case for the city's fortune reversal. The new institution, which was founded after a long battle between the cartel watchdog and the financial regulators, has a stake of around 70% in the southern Japanese prefecture.
The merger has the blessing of Suga, who has emphasized the need for regional bank consolidation to survive the dwindling local economies and years of extremely low interest rates. Japan's banking regulator has halted the deal as a model for streamlining an overcrowded regional banking sector.
But the community is not happy.
Some in Nagasaki resent the merged bank, which would be part of a financial group based in Fukuoka Prefecture, and may no longer focus on local borrowers.
"I'm worried that the new bank might pay less attention to Nagasaki," said Ryuji Kuon, owner of a boat tour company. "There is no clear explanation of how the merger would help us."
There is also concern that a lack of competition would give the new Juhachi-Shinwa bank the power to impose higher interest rates or unfavorable conditions on small borrowers.
"When running a business, it is always good to take advice from multiple banks," said Tadayuki Yasui, a pizza shop owner. "We won't have this opportunity again."
Juhachi-Shinwa says it will make sure borrowers are not at a disadvantage and set up a third party committee to oversee its lending practices.
However, those concerns were large enough to alert Japan's antitrust watchdog, resulting in a multi-year delay in the merger.
They also highlight the challenges Suga faces in creating stronger banks without marginalizing small businesses.
"Mergers between regional banks operating in the same prefecture, such as Nagasaki, can lead to branch closings and job losses, which are not well received by the local community," said Satoru Kado, an analyst at Mitsubishi UFJ Research and Advisory.
"Without cutting costs, however, it would be difficult for many regional banks to survive because traditional lending has made it difficult to make money," added Kado.

CONSOLIDATION
Regulators have long pushed regional banks to consolidate as their combined net income has fallen 40% over the past four years. Data shows that more than 100 lenders in 47 prefectures are competing for credit margins that have plummeted to a meager 0.2%.
To avoid delays in the next merger, the government laid the groundwork for smoother consolidation in May by exempting regional bank consolidations from antitrust rules.
Policy makers say orderly mergers are crucial as the coronavirus-hit economy could lead to heaps of bad loans.
Regional banks have been slow to react, however, as differences in corporate culture hold back many of their executives from merging.
And revitalizing a prefecture like Nagasaki - an example of other suffering local economies - will not be easy, even with larger banks.
Nagasaki was Japan's only gateway to the world during its national isolation in two centuries and thrived as a cosmopolitan financial center. Until about a decade ago, it flourished as the home of Mitsubishi Heavy Industries shipbuilding plants. However, the company lost market share to its South Korean and Chinese competitors.
The prefecture's population shrank 1.12% in 2019, the eighth fastest pace in Japan as the younger generation moved to bigger cities in search of better jobs. Nagasaki's tourism industry evaporated amid the pandemic.
Juhachi-Shinwa executive officer Tomoyuki Ushijima says the merger could help revive Nagasaki. But he added that borrowers also need to bring their deeds together.
"The only way to survive in a shrinking economy is by increasing productivity," he said. "Given the major challenges, we banks have decided to join forces. Borrowers may have to consider this too."

(Reporting by Leika Kihara and Takahiko Wada. Editing by Gerry Doyle)

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