November 14, 2017 / 8:12 AM / 5 days ago

Japan's top banks lay out cost-cutting plans amid lending gloom

TOKYO (Reuters) - Japan’s top banks are accelerating cost-cutting measures as low interest rates and strict capital regulations continue to sap profits, with Mizuho Financial Group (8411.T) saying it would hire fewer people over the next decade to trim expenses.

FILE PHOTO: Japan's national flag is seen behind the logo of Mitsubishi UFJ Financial Group Inc (MUFG) at its bank branch in Tokyo, Japan September 5, 2017. REUTERS/Kim Kyung-Hoon/File Photo

Japanese banks have been hit by diminishing returns on loans with the Bank of Japan aggressively driving down interest rates to combat deflationary pressures.

BOJ has said it would maintain its stimulus programme with inflation still quite far from a 2 percent target.

“It’s difficult to increase revenues in this competitive environment and the negative rate policy,” Mizuho CEO Yasuhiro Sato said at a briefing on Monday, after the lender reported a 12 percent drop in its second-quarter profit.

“Boosting cost competitiveness and productivity is imperative,” he added.

Japan’s No.3 lender by profits said it would reduce 19,000 positions, or a quarter of its total workforce, over the next 10 years by curbing the number of new hires, and close about 100 of its 500 domestic locations by the end of March 2025.

Mizuho’s expense ratio, or percentage of costs versus gross profits, has risen sharply, touching 72.4 percent in the six months ended September, from 61.8 percent just three years ago.

“Cost control is a focus for the bank, especially for their domestic business as their revenues are not growing,” said Toyoki Sameshima, head of equity research at BNP Paribas Securities in Tokyo.

Top Japanese lender Mitsubishi UFJ Financial Group (MUFG) (8306.T) has chosen automation as a way to increase efficiency amid the bleak lending landscape and a shrinking population.

MUFG has plans to automate 30 percent of operations at its core banking unit by 2024, using software robots and artificial intelligence for paperwork that would otherwise take 9,500 employees to process.

MUFG on Tuesday reported a 12 percent rise in second-quarter profit, buoyed mainly by gains from sales of stock holdings.

“We need to change our business structure that has been centred around lending business,” CEO Nobuyuki Hirano said at an earnings briefing. “We also need to change our cost structure.”

LAYOFFS UNLIKELY

However, measures to change cost structures will likely steer clear of layoffs, which are rare for Japanese banks where life-time employment is a norm and management would risk their reputation if they let go of people unless their companies were in serious financial trouble.

Sato said Mizuho was not considering early retirement calls.

Japan’s No. 2 lender Sumitomo Mitsui Financial Group (SMFG) (8316.T) plans to reduce workload that was equivalent to 4,000 workers by the end of March 2021, but CEO Takeshi Kunibe said the bank does not “mean to reduce 4,000 employees”.

“Rather, we will transfer these people to our focus business areas,” he said at a briefing on Tuesday, after reporting a small 2.2 percent rise in quarterly profit, also aided by gains on sales of stock holdings.

Japanese banks typically buy shares of corporate clients to cement ties, but this practise has come under pressure from investors and regulators who want lenders to trim such holdings worth billions of dollars and cut exposure to market swings.

SMFG and Mizuho reiterated their forecasts for a drop in annual profits, while MUFG retained its projection for a small 2.5 percent rise, as the banking sector also faces headwinds on the regulatory front due to stricter global capital rules.

Basel III rules require lenders to set aside more capital for risky assets such as loans - aimed at preventing the recurrence of the financial crisis a decade ago.

Reporting by Taiga Uranaka; Editing by Himani Sarkar and Edmund Blair

Our Standards:The Thomson Reuters Trust Principles.
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