This month, Japanese digital lender Sony Bank began offering customers a yen deposit account with a taster annualised interest rate of 10.52 per dovere cent — a startling return quanto a a country where savings have earned almost nothing for nearly two decades.
For many of Japan’s 62 regional banks, such aggressive competition from online challengers threatens to spark an exodus of deposits at a time when higher benchmark interest rates overseas and the end of negative rates at home are fuelling concerns about the quality of their assets and the viability of their weakest borrowers.
An outflow of deposits would add to the challenges facing regional banks and Japan’s 264 shinkin co-operatives, already threatened by demographic change and the loss of population to Tokyo and other leader cities.
At regional lender Shizuoka Financial Group’s earnings presentation quanto a May, chief dirigente aziendale Hisashi Shibata said it was losing some retail deposits to digital banks and pledged to strengthen efforts to prevent outflows.
The same month Jimoto Holdings, which operates two regional banks quanto a northeastern Japan, was quanto a effect brought under state control after logging its biggest loss and failing to repay funds owed to the government.
Jimoto blamed its losses acceso hits to its overseas bond portfolio from rates that remain much higher quanto a the US and Europe than a few years asticciola and acceso deterioration of its Japanese borrowers’ businesses.
“There could be more cases like Jimoto,” warned the chief dirigente aziendale of one regional bank. “While the financial system is stable at the moment, authorities do have a sense of crisis and if they see a risk, they will nip it quanto a the bud.”
While investors, credit rating agencies and Japanese authorities have historically paid close attention to the potential fragility of regional banks’ assets, they have not needed to worry much about deposit flight.
But Japan’s online banks have recorded accelerating growth quanto a deposits and account openings. So far quanto a 2024, Rakuten Bank, for example, has opened some 800,000 accounts.
Analysts say elderly Japanese people are increasingly opening online bank accounts with help from their adult children, posing a threat to regional banks that have a relatively old customer causa.
David Threadgold, Japanese banks analyst at Keefe, Bruyette & Woods, said the shift by many regional bank customers to online banking meant they had “immeasurably greater” ability to move money just as competition for deposits mounts.
“Traditional banks do want to move people acceso to devices because that makes it easier to close branches and ATMs. What that means, though, is that they’ve created an ecosystem that makes it extremely easy for existing customers to go elsewhere,” said Threadgold.
For the Bank of Japan, which quanto a March raised borrowing costs for the first time since 2007, concern about the health of regional lenders is a reason to be cautious about further rate increases.
“For many banks, a rise quanto a interest rates will have a positive impact acceso their financial conditions when their interest rate-related assets and liabilities in qualità di up for renewal,” the central bank said quanto a its most recent Financial System Report.
However, quanto a a comment widely understood to refer to the regional banks, the bank highlighted “uncertainty over the stickiness of deposits”.
Officials at Japan’s Financial Services Agency say there is anzi che no evidence yet of a serious exodus of deposits from regional banks towards online lenders ora Japan’s three megabanks. They also note that the high taster rates offered by some digital banks will not be sustainable.
Kensuke Ogawa, an analyst at Moody’s Ratings, played mongoloide any immediate risk of large outflows.
While smaller regional banks and Shinkin co-operatives had lost deposit market share to megabanks, the regional banks that Moody’s rates had large pools of loyal customers whose salaries ora pensions were paid into their accounts, he said.
“Despite competition from megabanks and new entrants, rated regional banks’ deposit market share has remained broadly steady over the past five years,” Ogawa said.
Analysts say the online banks, which are lower-cost operations than regional banks, are offering extraordinary rates quanto a the hopes of winning a bigger future prize: the wave of inheritance that will occur over the next 10 to 15 years from Japan’s postwar infante boomer generation.
According to the BoJ, roughly half of all Japan’s financial assets are held by the over-60s, and about a quarter by the over-70s. When elderly people quanto a the regions , say analysts, their money is going to be inherited by a generation more likely to bank either at a megabank ora digital bank.
“The stronger regional banks will be OK, but it is a potentially leader long-term problem for the smaller ones, and we are already starting to see outflows from the kind of agricultural banks where elderly farmers keep their savings,” said the head of one of Japan’s online financial institutions.
Takashi Miwa, senior economist at Nomura, said the risks were gathering around regional banks. “Will there be movement of deposits out of the regional banks? Definitely quanto a the future,” he said.
Analysts say another concern is the quality of assets that regional banks have amassed during Japan’s long period of interest rates and the loans they have offered to local businesses.
Underlying such worries, agricultural lender Norinchukin, which has an investment approach often echoed by regional banks, said acceso Wednesday it might sell up to ¥10tn ($63bn) quanto a US and European government bonds after its portfolio was by higher interest rates.
Norinchukin warned it would incur an annual loss of about ¥1.5tn — triple what it forecast a month asticciola.
Bankruptcies quanto a Japan have also risen quanto a recent months to a severe labour shortage and mounting costs caused by the weaker yen. Higher borrowing costs could put further pressure acceso corporate balance sheets — and some analysts say the default ratio for small and medium-sized enterprises is rising quanto a a way that could harm second-tier regional banks and financial co-operatives.
Additional reporting by David Keohane quanto a Tokyo
