TOKYO, June 26 (Reuters) - A proposed merger between two banks in southern Japan will likely be delayed for a second time over monopoly concerns, sources said, highlighting the difficulty regional banks face in trying to consolidate to survive the shrinking market.
Last year, the largest banking group on the island of Kyushu, Fukuoka Financial Group Inc, said it wanted to buy local rival Eighteenth Bank. It intended to merge it with Shinwa Bank, which it already controlled.
But Japan's Fair Trade Commission objected because the merged entity would control an unprecedented level of about 70 percent of loans in Nagasaki prefecture. The FTC argued the merger would undermine competition and lead to higher interest rates, poorer service and branch closures in remote areas.
To overcome the objections, Shinwa Bank and Eighteenth Bank had been preparing to sell loans to other banks, but three officials familiar with the matter said reaching the target would be difficult. One official said the banks were not expected to sell enough loans to satisfy the FTC.
Japan's 100-plus regional banks have struggled, particularly in rural areas, as the country's dwindling population has led to weaker loan demand. Wafer thin lending margins under the Bank of Japan's negative rates policy has also squeezed profitability.
To survive, some have tried to merge with neighboring rivals, but so far the sector has remained largely unchanged even as big city banks contracted from 21 to three "megabanks" over the past 20 years.
Fukuoka Financial Group's president said earlier this month that he still hoped to complete the merger by October. A spokesman said the bank would have to decide in July whether to delay the transaction.
Elsewhere, two smaller banks in Niigata prefecture Sea of Japan coast, Daishi Bank Ltd and Hokuetsu Bank Ltd , agreed to merge and are awaiting authorities' approval. (Writing by Junko Fujita; editing by Malcolm Foster & Simon Cameron-Moore)