This month, Japanese digital lender Sony Bank began offering customers yen savings accounts with a trial interest rate of 10.52% per year, a remarkable yield in a country where savings have generated little profit for almost two decades.
For many of Japan’s 62 regional banks, stiff competition from online challengers threatens to trigger deposit outflows at a time when rising base rates overseas and the end of negative domestic interest rates are raising concerns about asset quality and the viability of the weakest borrowers.
The outflow of deposits will exacerbate the challenges facing regional banks and Japan’s 264 banks. Shinkin Cooperatives are already under threat from demographic change and the migration of people to Tokyo and other big cities.
At a financial results briefing held by regional bank Shizuoka Financial Group in May, Chief Executive Officer Hisashi Shibata said some retail deposits were being shifted to digital banks and promised to step up efforts to prevent this.
In the same month, Jimoto Holdings, which operates two regional banks in the Tohoku region, was effectively placed under state control after recording its biggest ever losses and failing to repay debts to the government.
Jimoto blamed the losses on a hit to its overseas bond portfolio due to interest rates in the United States and Europe still being significantly higher than a few years ago, as well as a downturn in business among Japanese borrowers.
“We may see more cases like Jimoto’s in the future,” warned the chief executive of one regional bank. “The financial system is stable for now, but the authorities are aware of the danger, and if they see any risk, they will nip it in the bud.”
Investors, rating agencies and Japanese authorities have historically paid close attention to potential vulnerabilities in regional banks’ assets but have not had to worry too much about deposit outflows.
However, Japanese online banks are seeing accelerating growth in deposits and account openings. Rakuten Bank, for example, plans to open approximately 800,000 accounts by 2024.
Analysts say older people in Japan are increasingly opening online bank accounts with the help of their adult children, posing a threat to regional banks with their older customer base.
David Threadgold, a bank-of-Japan analyst at Keefe, Bruyette & Woods, said many regional banks have shifted their customers to online banking amid increased competition for deposits, giving them an “immeasurable boost” in the ability to move funds.
“Traditional banks want to move customers to devices because it makes it easier for them to close branches and ATMs. But it means they’ve built an ecosystem that makes it very easy for existing customers to move to another bank,” Threadgold said.
For the Bank of Japan, which raised borrowing costs in March for the first time since 2007, concerns about the health of regional financial institutions are giving it reason to be cautious about raising interest rates further.
“For many banks, higher interest rates will have a positive impact on their financial position as their interest rate-related assets and liabilities come due for renewal,” the central bank said in its latest Financial System Report.
But in comments widely understood to be referring to regional banks, the bank highlighted “uncertainty about the stickiness of deposits.”
Officials at Japan’s Financial Services Agency say they have yet to see evidence of a mass exodus of deposits from regional banks to online lenders or Japan’s three biggest megabanks, and they say the high trial interest rates being offered by some digital banks are unsustainable.
Moody’s Ratings analyst Kensuke Ogawa played down the imminent risk of big outflows.
Small regional banks and Shinkin He said cooperatives had lost deposit market share to the megabanks, regional lenders rated by Moody’s that had large, loyal customer bases into which their salaries and pensions were deposited.
“Despite competition from megabanks and new entrants, the deposit market share of rated regional banks has remained broadly stable over the past five years,” Ogawa said.
Analysts say online banks, which operate at lower costs than regional banks, are offering outlandish interest rates in the hope of capturing bigger future profits – a wave of inheritances expected to come from Japan’s postwar baby boomers over the next 10 to 15 years.
According to the Bank of Japan, roughly half of Japan’s financial assets are held by people over 60, and about a quarter by those over 70. When older people in rural areas die, their assets are passed on to a generation more likely to deposit them in megabanks or digital banks, analysts say.
“Strong regional banks will be fine, but it could be a big problem in the long term for smaller banks. We’ve already seen outflows of funds from places like agricultural banks, where elderly farmers keep their savings,” said the head of a Japanese online lender.
Nomura senior economist Takashi Miwa said risks were concentrated in regional banks. “Will there be an outflow of deposits from regional banks? There will definitely be an outflow in the future,” he said.
Another concern, analysts say, is the quality of the assets regional banks have accumulated during Japan’s long period of zero interest rates and the loans they have provided to regional businesses.
The concerns came as agricultural finance company Norinchukin Bank, which has a similar investment approach to regional banks, said on Wednesday it may sell up to 10 trillion yen ($63 billion) of U.S. and European government bonds after rising interest rates hit its portfolio.
Norinchukin Bank warned that it would lose about 1.5 trillion yen for the year, three times what it had predicted a month ago.
Japan has also seen an increase in bankruptcies in recent months due to a severe labor shortage and rising costs caused by the weak yen. Some analysts say higher borrowing costs could put further pressure on corporate balance sheets, leading to higher default rates among small and medium-sized companies and dealing a blow to second-tier regional banks and financial cooperatives.
Additional reporting by David Keohane in Tokyo
