* Suruga Bank shares jump as much as 16 percent
* FSA measures less harsh than market expected
* Bank execs resigned last month over improper loan practices (Adds analyst quote, comment from panel report, other details)
TOKYO, Oct 3 (Reuters) - Japan’s financial regulator will order Suruga Bank to stop making new loans for property investments in the aftermath of a lending scandal that has slammed the regional bank’s shares and led to the exits of its top executives, two sources said.
Suruga’s shares, however, surged as much as 16 percent on Wednesday as the measures were not as harsh as expected, some market participants said.
The bank’s chairman and president resigned last month after a third-party panel found the lender falsified documents on loans made to retail investors who built “share houses” where tenants share bathrooms and other facilities.
Suruga’s improper loan practices came as many regional banks struggled to find profits with their depopulating local economies shrinking and the Bank of Japan’s near-zero interest rates squeezing lending margins.
Japan’s Financial Services Agency (FSA) has determined that improper lending at Suruga was widespread and its governance functions had failed, the two people, who have direct knowledge of the matter, told Reuters.
Following onsite probes that ended in late September, the FSA in coming days will order Suruga to stop extending new loans for property investment and improve its governance, they added, on condition of anonymity as the order has not been announced.
An FSA spokesman declined to comment.
Suruga said in a statement it had not been informed of any such measures by the FSA.
Suruga shares surged to a high of 678 yen ($5.96) in Tokyo, and closed up 11.3 percent. The shares have slumped about 70 percent since the beginning of this year.
“It seems there has been buying on all the bad news having come out, along with the view that the measures are lighter than anticipated,” said one Japan-based analyst.
Suruga’s fall from grace is dramatic given the bank has previously been praised by investors and even some FSA officials as a role model for other regional banks in its efforts to build a sustainable business model.
With 4.5 trillion yen ($39.53 billion) in assets, Shizuoka prefecture-based Suruga Bank is a middle-sized lender that faces competition from much bigger rivals in the region.
Instead of joining the rate-cutting race, the bank carved out a niche by extending mortgages to borrowers who had been shunned by other lenders, such as single women and foreigners, and therefore are willing to pay more interests.
Most of its 3.25 trillion yen in outstanding loans as of end-March were to retail customers, a bank earnings statement shows.
Suruga is the only regional lender to have branched out into share-house loans, according to analysts.
But it is the failure of the bank management to examine and discuss risks of businesses that its rivals do not take up has led to its troubles, a third-party panel investigating Suruga’s share-house loan scandal said in a report.
“There are reasons no other banks do particular businesses,” the panel said in the report published in September.
Ratings agency Fitch said last month pressure to find new revenue sources could have led to slipping governance standards at Suruga’s peers too. Regional banks are limited in their ability to find alternative income by offering complex products or overseas expansion, it said.
More than half of them - 54 banks - suffered losses in their core business profits, or earnings from lending and fees, for the year ended in March, the FSA reported last month. ($1 = 113.8400 yen) (Reporting by Takahiko Wada; Additional reporting by Sam Nussey and Daiki Iga; Editing by Muralikumar Anantharaman and Himani Sarkar)