Fitch Expects More Consolidation Among Japanese Banks

Tom Burroughes

8 November 2018

The number of Japanese banks has contracted from around 150 banks in 1999 to 116 now, and the figure is likely to slowly shrink further amid industry consolidation, according to an update on the country by , the credit rating agency.

With the present Japanese government pushing corporate governance and other supply-side reforms to boost growth, after more than two decades of sluggish performance, banks are unlikely to escape the impact of further efficiencies, the agency said.

“These banks continue to face pressure on profit from limited non-interest revenue sources and geographical diversification, and a challenge to generate sustainable profit, which is one of the reasons to consider consolidation for future success,” the organisation said in a report.

Several of the banks in the study, such as Bank of Tokyo-Mitsubishi UFJ, for example, operate in areas including wealth management. To date, Japan’s private banking/wealth sector remains overwhelmingly dominated by domestic, rather than international players.

Half of Japan’s economy is covered by 105 regional banks, "shinking" banks and credit unions; the remaining 50 per cent is covered by 11 larger city, trust and other banks. (A shinking bank is a form of deposit institution.)

“Asset quality and liquidity have remained healthy, yet the trends point towards rising risk appetite as banks seek higher-return products and investments. Loan/deposit ratios are rising as the regional banks are likely to win market share on mortgages and other individual loans from city banks. Meanwhile, the banks' sound capital buffers over regulatory requirements are declining,” it said.

Non-performaing loans and credit costs are declining, the report said. With regional banks, their asset quality is weaker than is the case for city and trust banks because of their greater exposure to small- and medium-sized enterprises, the report said.

The top-tier city and “mega” banks are Bank of Tokyo-Mitsubishi UFJ; Sumitomo Mitsui Banking Corporation; Mizuho Bank; Resona Bank and Saitama Resona Bank. Among the trust banks are Mitsubishi UFJ Trust and Banking Corporation; Mizuho Trust & Banking Co; Sumitomo Mitsui Trust Bank and The Nomura Trust and Banking Co.

Fitch predicts that Japanese real gross domestic product (taking inflation into account) will expand by 1.1 per cent in 2018 and 0.9 per cent in 2019.