Japan’s Struggling Regional Banks Take Investment Risks To Stay Afloat

Japan’s struggling regional banks are taking on riskier investments as they struggle to survive.

The banks have been hurt by rock-bottom interest rates, as well as an industry shakeout, according to Bloomberg. While authorities are promoting consolidation, the banks are attempting to avoid it by trying to prove they can handle riskier holdings.

“There’s excessive competition among regional banks now, which is driving fierce competition to get profit margins,” said Takayuki Atake, head of credit research at SMBC Nikko Securities Inc. “They used to only buy domestic bond products, but they have no choice but to take risks by looking into overseas debt.”

Last week, for example, the country’s local lenders bought Samurai bonds sold by Export-Import Bank of India with a BBB+ rating — three steps away from junk. And last month, some regional banks invested in the first negative-yielding note issued by a Japanese agency.

Moody’s Investors Service has warned that these riskier investments could make the banks’ earnings more volatile, as well as cost them more in order to comply with financial regulations. Last month, Moody’s said “the inability of Japanese banks to maintain profits without taking on more risk” was the reason it placed some of the regional lenders on review for downgrade.

In fact, downgrades and outlook cuts of regional lenders have increased to 13 so far this year.

As a result, lawmakers are planning to keep a closer eye on the increased competition among the banks. For example, the Financial Services Agency last month announced plans to monitor regional lenders to ensure their operations are sustainable, including putting pressure on poorly performing banks to change their business models.

In addition, the government announced earlier this year plans for forthcoming legislation that will exempt regional banks from anti-monopoly law for 10 years in an attempt to promote mergers.