Likely Nomura exit from lender may spur Japan regional bank shake-up

12/19/2013

By Taiga Uranaka

TOKYO, Dec 19 (Reuters) - Ashikaga Holdings Co Ltd's return to Japan's stock market has rival lenders bracing for the exit of its main shareholder Nomura Holdings Co - an event expected to trigger consolidation among the country's regional banks.

Japan has more than 100 regional banks, accounting for around 40 percent of the country's $4.6 trillion in outstanding loans. But overall loan demand has shrunk 10 percent over the last 20 years, prompting regulators to call for convincing growth strategies and increasing pressure on the banks to consider acquisitions.

Any unloading of Nomura's 38 percent stake - one that translates to effective control - is likely to go to a rival in a neighbouring market, rocking the boat in highly competitive regions just north of Tokyo and spurring other lenders to also bulk up, industry experts say.

Nomura bought into Ashikaga in the wake of the bank's nationalisation 10 years ago due to bad debts. But the investment by Japan's biggest brokerage was purely financial and an exit is widely seen as just a matter of timing.

"Ashikaga's listing is not the end of the story. Our attention is on whom Nomura will sell its stake to," said a senior executive at a rival regional bank.

"It will definitely be a trigger for industry consolidation," said the executive, who declined to be identified.

It is not clear when Nomura will begin talks to offload the stake but a source familiar with the investment bank's thinking said it "was considering action that would encourage regional bank consolidation in the not too distant future".

Nomura said that nothing had been decided and that it would look at all possible options in the future. Ashikaga declined to comment.

Ashikaga jumped 8 percent to 455 yen in morning trade in its market debut, giving it a market value of 148 billion yen ($1.4 billion) that ranks it about No.18 among Japanese regional banks.

It raised some $260 million from the offering, which only consisted of newly issued shares. The funds will be used to buy back preferred stock.

LONG OVERDUE

While industry insiders say it's too early to pin down which regional banks might emerge as potential suitors to Ashikaga, they note that lenders such as Joyo Bank Ltd and Gunma Ltd are fierce competitors for loans north of Tokyo.

Banks with national networks underwent a major realignment after the bursting of the bubble economy in the 1990s, resulting in a winnowing of more than dozen lenders to just four major banking groups.

But few regional banks have bitten the bullet in terms of M&A and a shake-up is widely viewed as long overdue.

There have been two regional banks merger announcements in the past two years but neither threatened to change the competitive landscape - one covered regions where loan demand is seen as particularly weak while another was between two Tokyo lenders.

A recovering economy on the back of bold monetary and fiscal policies from Prime Minister Shinzo Abe is also providing little incentive for immediate action.

Combined first-half net profit for the nation's 106 regional banks jumped 46 percent, helped by smaller credit costs and a fall in impairment losses on their stock holdings, government data shows.

But there is no getting around a bleak outlook for growth given Japan's declining population, especially in regional areas. A small pick-up in loan volumes has been by driven by the acquisition financing needs of large firms, and by cash-strapped utilities - demand that is serviced by banks with national networks.

Regional lenders instead are left to scrabble over offering loans to the few clients in their areas that need them, cutting interest rates lower and lower in a bid to gain business.

But this year Japan's Financial Services Agency as part of its annual inspections has begun asking regional banks to present a convincing growth strategy for the next five to 10 years, a move seen by many bankers as a prod to seek mergers and acquisitions.

"Consolidation has to happen eventually no matter what. There are too many banks. I know some banks are considering some moves," said a senior executive at a top national lender. ($1 = 103.2050 Japanese yen) (Additional reporting by Emi Emoto and Noriyuki Hirata; Editing by Edwina Gibbs)



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