TOKYO (Reuters) - The grim outlook for Japan’s smaller regional banks, who are suffering as Japan’s rural population shrinks rapidly, is prompting some to dive into a new, potentially lucrative line of business that until now was largely taboo: mergers and acquisitions.
In Japan’s traditional banking culture, advising a client to sell a firm was considered unseemly, even rude - implying that the business had failed.
Yet more small business owners in rural areas are struggling to find successors because their children - who have often moved to the big cities - are not interested in taking over. Some of these owners are now being persuaded by the smaller regional banks – numbering about 100 - that getting acquired isn’t such a bad solution.
When 70-year-old Kuniya Shinohara decided to retire from his restaurant and catering business, he didn’t know what to do because his daughter and son-in-law weren’t interested in taking it over.
Shinohara’s lender, Gunma Bank Ltd (8334.T), suggested he sell his business in Maebashi city, about 80 miles north of Tokyo, to an outsourcing agency called K‘BIX Inc that was looking to diversify.
“I was afraid I would become a loser by selling my business,” said Shinohara, who initially didn’t want anyone to know about the deal. “But Gunma Bank eased my concern by saying an M&A could benefit both parties.”
Getting commissions on such deals could provide a lifeline to regional banks, whose profit margins are getting squeezed – not only by the dwindling rural population and the closures of family businesses but also by near-zero interest rates. Teikoku Databank, a nationwide corporate research firm, released a survey in 2016 showing that two-thirds of business owners across Japan don’t have successors.
Traditionally, regional banks have focused on lending, which fuelled their profits, said Hironari Nozaki, professor at Kyoto Bunkyo University and a former banking analyst.
“That was not necessarily meeting their clients’ needs,” he said. “Regional banks for a long time have failed to identify clients’ real problems.”
That didn’t matter when they could pull in the deposits and then lend them out at an attractive margin. But now those deposits aren’t flowing in and margins have been squeezed with rates low and as corporate customers in small cities aren’t expanding and therefore don’t need to borrow.
Unlike the biggest banks, which have operations nationwide, the business of regional banks is closely tied with the local economies where they are headquartered.
Japan’s Financial Services Agency, the nation’s industry watchdog, said last month that more than half of the nation’s regional banks lost money on their core business - lending and fees - in the year to March 2017.
In the past, when many businesses were handed down from father to son, banks tried to keep the value of businesses low to reduce taxes, said Kazutaka Nobusawa, an official at Gunma Bank’s consulting division.
“Now we try to value the business as high as possible” to bring income to clients, he said.
Gunma Bank, which in recent years arranged just ten M&A deals annually, says about 7,000 of its clients are potential candidates to acquire other businesses or be acquired.
And the Bank of Kyoto Ltd (8369.T) in March brokered rice wholesaler Shinmei Co’s acquisition of Kobe Marukan Co, a seafood wholesaler in nearby Kobe.
The bank, which employs 3,400 people, boosted the number of staff devoted to M&A to 10 last year from three in 2012, and aims to double its revenue from the division to 1 billion yen ($8.8 million) by the year ending March 2020, according to Bank of Kyoto.To the south, Fukuoka Bank Ltd, part of Fukuoka Financial Group (8354.T), created an investment banking unit last year to focus on M&A. And a recent seminar in Tokyo on M&A was attended by representatives from about 30 regional banks.
The trend won’t likely hurt the emergence of boutique advisors that handle micro M&A deals, said Kunihiko Arai, president of Strike Co (6196.T), one such dealmaker.
“Regional banks will not threaten our business because we are interdependent,” he said. “They need us when they look for a matching partner beyond their turf.”
Over time, the trend could prompt regional banks to be merger candidates themselves because banks will need to expand their reach outside their local areas to increase earnings opportunities, said Nozaki at Kyoto Bunkyo University.
That would mean a consolidation in Japan’s regional banking sector, which has remained largely unchanged even as big “city” banks have contracted from 21 to three “megabanks” over the past 20 years.
“Regional banks’ resources are limited,” Nozaki said. “How they build their databases through alliances and reorganization will be key.”
Reporting by Junko Fujita; Editing by Malcolm Foster and Martin Howell